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Another look at the rationality of the stock market

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  • Samih Antoine Azar

Abstract

A model due to Lucas is estimated between the real stock market returns and real dividends on the market index. The sample spans the period from 1872 to 1987 on an annual basis. The results are close to theoretical expectations: the coefficient of relative risk aversion, which minimizes the sum of square residual, is estimated to be around 0.89, and the discount rate around 8%. This means that a relatively simple valuation model is capable of describing the stock market, lending support to the rationality of this market.

Suggested Citation

  • Samih Antoine Azar, 2000. "Another look at the rationality of the stock market," Applied Economics Letters, Taylor & Francis Journals, vol. 7(2), pages 87-89.
    • Handle: RePEc:taf:apeclt:v:7:y:2000:i:2:p:87-89
    DOI: 10.1080/135048500351870
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    References listed on IDEAS

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    1. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
    2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
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    Cited by:

    1. Samih Antoine Azar, 2015. "How much are you Willing to Pay to Play the Saint Petersburg Gamble?," International Journal of Financial Economics, Research Academy of Social Sciences, vol. 4(2), pages 101-108.
    2. Samih Antoine Azar, 2008. "The Effect of the Lebanese Peg to the US Dollar on Market Efficiency and Risk," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 7(1), pages 1-15, January.
    3. Samih Azar, 2011. "Retesting the CCAPM Euler equations," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 7(4), pages 324-346, September.

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