Empirical Rationality in the Stock Market

Publikation: Working paperForskning

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Abstract

This paper approximation errors are introduced in a Luca (1978)-type model to reflect model uncertainty. The purpose is twofold. First, the rational investor is allowed to take model uncertainty into account when asset prices are determined. Second, the statistical degeneracy, common to most structural models, is broken and maximum likehood inference made possible. The model is estimated using U.S. stock data. The equilibrium price is seriously affected by the existence of approximation errors and the descriptive and normative properties are greatly improved. This suggest that investors do not and should not ignore approximation errors.
OriginalsprogEngelsk
UdgivelsesstedFrederiksberg
UdgiverInstitut for Finansiering, Copenhagen Business School
Antal sider29
ISBN (Elektronisk)8790705572
StatusUdgivet - 2001
NavnWorking Papers / Department of Finance. Copenhagen Business School
Nummer2001-9
ISSN0903-0352

Emneord

  • Aktiemarkeder
  • Asset pricing
  • Rational expectations

Citationsformater