The behavior of speculative prices and the consistency of economic models

Modern financial economic theory suggest that changes in speculative prices should follow simple ‘fair game’ processes in an informationally efficient capital market. The observation that changes in speculative prices follow simple time series processes both supports this theoretical proposition and suggest restrictions on the transfer functions of structural econometric models in which speculative prices appear as output variables. The simplicity of the time series processes for observed changes in speculative prices are shown to impose strong restrictions on potential equilibrium models of asset pricing, informational disequilibrium models of financial markets, and many monetary and macroeconomic models as well.