The stock market, The Theory of Rational Expectations and the Efficient Market Hypothesis - Information, competition and the Stocks markets - Efficient Market Hypothesis: Rational expectations in Financial Markets

4 important questions on The stock market, The Theory of Rational Expectations and the Efficient Market Hypothesis - Information, competition and the Stocks markets - Efficient Market Hypothesis: Rational expectations in Financial Markets

What is the Rationale behind the Rational expectations?

  • If the optimal forecast at return is higher than the equilibrium rate --> price goes up --> optimal forecast will go down
  • If the optimal forecast at return is lower than the equilibrium rate --> price goes down --> optimal forecast will go up
--> this until Rof = R*

How Valuable are Published Reports by Investment Advisors?

Information in newspapers and in the published reports of investment advisers
is readily available to many market participants and is already reflected in market prices.
• Acting on this information will not yield abnormally high returns, on average.
• The empirical evidence for the most part confirms that recommendations from investment advisers cannot help us outperform the general market

What do some financial economists believe?

That all prices are always correct and reflect
market fundamentals (items that have a direct impact on future income streams of the securities) and so financial markets are efficient.
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What casts serious doubt on the stronger view that financial markets are efficient?

That prices in markets like the stock market are unpredictable

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