The Rationality and Efficiency of Stock Price Relative to Money Announcement Information |
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| Authors: | William G Foote |
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| Institution: | Syracuse University, Syracuse, NY 13244. The author acknowledges the helpful comments of Donald Dutkowsky, Charles Webster, Jr., and Kenneth Fordyce. Portions of this paper were written while the author received support from International Business Machines Corporation, Numerically Intensive Computing Group, Kingston, New York. All errors and omissions are the author's responsibility. |
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| Abstract: | Recent studies find that stock price reacts only to unanticipated changes in the money supply. These studies assume a joint hypothesis of rationality and efficiency in their tests. This paper formulates a model in which stock price depends both upon anticipated and unanticipated money supply forecasts. From this model, an econometric model that separates the hypotheses of rationality and efficiency is estimated. The results show that investors rationally incorporate forecasts of the weekly current money announcement into stock price during the pre-October 6, 1979, sample period. However, efficiency with respect to money information cannot be corroborated in this period. Cross-equation restrictions implied by rationality are rejected during the post-October 6, 1979, period. In this period, efficiency again cannot be corroborated. Alternative money prediction specifications indicate the robustness of these results. |
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