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Market Credibility and Other Dietary Fads

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Abstract

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.

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  • Shojai, Shahin & Feiger, George, 2003. "Market Credibility and Other Dietary Fads," Journal of Financial Transformation, Capco Institute, vol. 7, pages 63-70.
    • Handle: RePEc:ris:jofitr:0006
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    Keywords

    Market efficiency; Rational Belief Hypothesis; Asset Prices;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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