Rational versus Adaptive Expectations in Present Value Models

Gregory Chow ()

The Review of Economics and Statistics, 1989, vol. 71, issue 3, 376-84

Abstract: Using data on stock price and dividends, and on long-term and short-term interest rates, the authors test an important implication of present value models--that current value is a linear function of the conditional expectations of the next-period value and the current determining variable . This implication, combined with rational expectations, is strongly rejected. Combined with adaptive expectations, it is accepted. The latter model can also explain the observed negative relation between the rate of return and stock price. Thus the rational expectations assumption should be used with caution; the adaptive expectations assumption may be useful in econometric practice. Copyright 1989 by MIT Press.

Date: 1989
References: Add references at CitEc
Citations: View citations in EconPapers (56)

Downloads: (external link)
http://links.jstor.org/sici?sici=0034-6535%2819890 ... O%3B2-E&origin=repec full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
Working Paper: RATIONAL VERSUS ADAPTIVE EXPECTATIONS IN PRESENT VALUE MODELS (1988)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tpr:restat:v:71:y:1989:i:3:p:376-84

Ordering information: This journal article can be ordered from
https://mitpressjour ... rnal/?issn=0034-6535

Access Statistics for this article

The Review of Economics and Statistics is currently edited by Pierre Azoulay, Olivier Coibion, Will Dobbie, Raymond Fisman, Benjamin R. Handel, Brian A. Jacob, Kareen Rozen, Xiaoxia Shi, Tavneet Suri and Yi Xu

More articles in The Review of Economics and Statistics from MIT Press
Bibliographic data for series maintained by The MIT Press ().