Empirical Rationality in the Stock Market

Research output: Working paperResearch

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.
Original languageEnglish
Place of PublicationFrederiksberg
PublisherInstitut for Finansiering, Copenhagen Business School
Number of pages29
ISBN (Electronic)8790705572
Publication statusPublished - 2001
SeriesWorking Papers / Department of Finance. Copenhagen Business School
Number2001-9
ISSN0903-0352

Keywords

  • Approximation errors
  • Model uncertainty
  • Estimation of structural models
  • Rational expectations
  • Asset pricing

Cite this

Raahauge, P. (2001). Empirical Rationality in the Stock Market. Frederiksberg: Institut for Finansiering, Copenhagen Business School. Working Papers / Department of Finance. Copenhagen Business School, No. 2001-9
Raahauge, Peter. / Empirical Rationality in the Stock Market. Frederiksberg : Institut for Finansiering, Copenhagen Business School, 2001. (Working Papers / Department of Finance. Copenhagen Business School; No. 2001-9).
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Raahauge, P 2001 'Empirical Rationality in the Stock Market' Institut for Finansiering, Copenhagen Business School, Frederiksberg.

Empirical Rationality in the Stock Market. / Raahauge, Peter.

Frederiksberg : Institut for Finansiering, Copenhagen Business School, 2001.

Research output: Working paperResearch

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Raahauge P. Empirical Rationality in the Stock Market. Frederiksberg: Institut for Finansiering, Copenhagen Business School. 2001.