Lecture06

Lecture06 - • Random Walk x t =x t-1 t • First-order...

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Lecture 6: Efficient Markets Economics 252, Spring 2008 Prof. Robert Shiller, Yale University
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Price as PDV of Expected Dividends • If earnings equal dividends and if dividends grow at long-run rate g , then by growing consol model P=E /( r-g ), P / E =1/( r-g ). (Gordon Model) • So, efficient markets theory with Gordon model purports to explain why P / E varies across stocks: different stocks have different g.
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Random Walk & AR-1 Models
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Unformatted text preview: • Random Walk: x t =x t-1 + t • First-order autoregressive (AR-1) Model: x t = 100 + (x t-1-100) + t. Mean reverting (to 100), -1< <1. • Random walk as approximate implication of unpredictability of returns • Similarity of both random walk and AR-1 to actual stock prices Actual US Stock Market and Random Walk with Trend Actual US Stock Market & AR-1( =.98) with trend...
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Lecture06 - • Random Walk x t =x t-1 t • First-order...

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