Do We Really Know that Financial Markets are Efficient?

20 Pages Posted: 12 Apr 2004 Last revised: 21 Sep 2010

See all articles by Lawrence H. Summers

Lawrence H. Summers

Harvard University; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Date Written: September 1982

Abstract

This paper examines the power of statistical tests commonly used to examine the efficiency of speculative markets. It shows that for markets with "long horizons" such as the stock markets, or the market for long term bonds, these tests have very low power. Market valuations can differ substantially and persistently from the rational expectation of the present value of cash flows without leaving statistically discernible traces in the pattern of ex-post returns. This observation also suggests that speculation is unlikely to insure rational valuations, since similar problems of identification plague both financial economists and would-be speculators.

Suggested Citation

Summers, Lawrence H., Do We Really Know that Financial Markets are Efficient? (September 1982). NBER Working Paper No. w0994. Available at SSRN: https://ssrn.com/abstract=303487

Lawrence H. Summers (Contact Author)

Harvard University ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

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