Market Credibility and Other Dietary Fads
Journal of Financial Transformation, Vol. 7, pp. 63-70, April 2003
8 Pages Posted: 15 Jun 2004 Last revised: 31 Aug 2009
This paper seeks to identify why stock prices behave the way they do. We find that conventional economic theories are unable to explain why there are so many long bull and bear markets. We suggest that it is investor expectations of future market movements, based on their views of other investors' opinions, that determine stock prices. Where there is aggregate optimism, stock prices will rise and vice versa. We extend the work of the Rational Belief Hypothesis by suggesting that today's extremely high P/E ratios are associated with a substantial dislocation between investment horizons and economic reality.
Keywords: Market efficiency, Rational Belief Hypothesis, Asset Prices
JEL Classification: G14, G12
Suggested Citation: Suggested Citation