Samuelsons Dictum and the Stock Market - 5643 Words

SAMUELSON’S DICTUM AND THE STOCK MARKET BY JEEMAN JUNG and ROBERT J. SHILLER COWLES FOUNDATION PAPER NO. 1183 COWLES FOUNDATION FOR RESEARCH IN ECONOMICS YALE UNIVERSITY Box 208281 New Haven, Connecticut 06520-8281 2006 http://cowles.econ.yale.edu/ SAMUELSON’S DICTUM AND THE STOCK MARKET JEEMAN JUNG and ROBERT J. SHILLER* Samuelson has offered the dictum that the stock market is ‘‘micro efï ¬ cient’’ but ‘‘macro inefï ¬ cient.’’ That is, the efï ¬ cient markets hypothesis works much better for individual stocks than it does for the aggregate stock market. In this article, we review a strand of evidence in recent literature that supports Samuelson’s dictum and present one simple test, based on a regression and a simple scatter†¦show more content†¦If changes in aggregate dividends are harder to predict, we might then expect that factors other than information about fundamentals, factors such as stock market booms and busts, would swamp out the effect of information about future dividends in determining price and make the simple efï ¬ cient markets model a bad approximation for the aggregate stock market. II. EVIDENCE IN THE LITERATURE FOR SAMUELSON’S DICTUM There is now substantial evidence in the published literature for Samuelson’s dictum. One of us (Shiller 1981) presented evidence that was interpreted as ï ¬ nding evidence of ‘‘excess volatility’’ in the stock market relative to the efï ¬ cient markets model using U.S. data 1871–1979 (see also LeRoy and Porter 1981; Campbell 1991). The same methods did not ï ¬ nd much evidence of inefï ¬ ciency in other principal components of industry stock market indexes over the same time interval (Shiller 1989, ch. 11). In this sense, the aggregate market was found to be inefï ¬ cient and the industry deviations from the aggregate market were not found to be inefï ¬ cient. To deal with criticisms that these