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Does the Stock Market Rationally Reflect Fundamental Values?

Lawrence H. Summers
The Journal of Finance
Vol. 41, No. 3, Papers and Proceedings of the Forty-Fourth Annual Meeting of the America Finance Association, New York, New York, December 28-30, 1985 (Jul., 1986), pp. 591-601
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328487
Stable URL: http://www.jstor.org/stable/2328487
Page Count: 11
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Does the Stock Market Rationally Reflect Fundamental Values?
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Abstract

This paper examines the power of statistical tests commonly used to evaluate the efficiency of speculative markets. It shows that 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 implies that speculation is unlikely to ensure rational valuations, since similar problems of identification plague both financial economists and would be speculators.

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