The economics of money, banking, and financial markets

CHAPTER 7

The Stock Market, the Theory of Rational Expectations,  

and the Efficient Market Hypothesis 

141

Computing the Price of Common Stock ..............................................................................141

The One-Period Valuation Model ....................................................................................... 142

The Generalized Dividend Valuation Model ........................................................................ 143

The Gordon Growth Model ................................................................................................ 143

How the Market Sets Stock Prices ..........................................................................................144

APPLICATION

  Monetary Policy and Stock Prices ....................................................146

APPLICATION

  The Global Financial Crisis and the Stock Market...........................146

The Theory of Rational Expectations .....................................................................................146

Formal Statement of the Theory ......................................................................................... 148

Rationale Behind the Theory .............................................................................................. 148

Implications of the Theory ................................................................................................. 149

The Efficient Market Hypothesis: Rational Expectations in Financial Markets ..........150

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Contents in Detail

Rationale Behind the Hypothesis ........................................................................................ 151

Random-Walk Behavior of Stock Prices .............................................................................. 152