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Towards a general theory of the stock market

Fender, John (2016) Towards a general theory of the stock market. Discussion Paper. University of Birmingham, Birmingham, UK.

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Although there are many stock market anomalies which the Efficient Market Hypothesis (EMH) finds difficult to explain, it also has its strengths, and so far no alternative hypothesis has been developed which can explain what the EMH explains but which can also do a better job in explaining the phenomena with which it struggles. It is argued that the way forward is to postulate that the stock market can be in one of three states: a fundamental state, in which share prices are determined as in the EMH, a bubble or bull market state, in which share prices are above their fundamental levels but continue to rise because asset holders expect to sell the shares at even higher prices in the future, and a bear market state, in which shares are held exclusively by 'irrational' agents and rational agents cannot exploit the overvaluation because of short-selling constraints. It is also argued that heterogeneous rational expectations may help explain some features of stock market behaviour.

Type of Work:Monograph (Discussion Paper)
School/Faculty:Colleges (2008 onwards) > College of Social Sciences
Number of Pages:50
Department:Birmingham Business School
Date:06 January 2016
Series/Collection Name:Birmingham Business School Discussion Paper Series
Keywords:efficient market hypothesis, rational expectations, bubbles, bear markets, short-selling constraints
Subjects:H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Copyright Status:This discussion paper is copyright of the University and the author. In addition, parts of the paper may feature content whose copyright is owned by a third party, but which has been used either by permission or under the Fair Dealing provisions. The intellectual property rights in respect of this work are as defined by the terms of any licence that is attached to the paper. Where no licence is associated with the work, any subsequent use is subject to the terms of The Copyright Designs and Patents Act 1988 (or as modified by any successor legislation). Any reproduction of the whole or part of this paper must be in accordance with the licence or the Act (whichever is applicable) and must be properly acknowledged. For non-commercial research and for private study purposes, copies of the paper may be made/distributed and quotations used with due attribution. Commercial distribution or reproduction in any format is prohibited without the permission of the copyright holders.
Copyright Holders:The Authors and the University of Birmingham
ID Code:2102

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