Rational Infinitely-Lived Asset Prices Must be Non-Stationary By Richard Roll Allstate Professor of Finance The Anderson School at UCLA

@inproceedings{Cochrane2000RationalIA,
  title={Rational Infinitely-Lived Asset Prices Must be Non-Stationary By Richard Roll Allstate Professor of Finance The Anderson School at UCLA},
  author={John Cochrane and Robert S. Geske and Jun Liu and Eduardo Schwartz},
  year={2000}
}
Rational expectations must not be expected to change. Hence, a rational expectation about a future random quantity must follow a pure martingale until the uncertainty is resolved. This implies that the expectation itself could be non-stationary and, in fact, is non-stationary if the increments are iid. Most asset prices are functions of expectations about future quantities, so asset prices also could be non-stationary. This has consequences for tests based on prices rather than on returns… CONTINUE READING

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Probability: Theory and Examples, 2 edition, (Belmont: Wadsworth

  • Durrett, Richard
  • Industrial Management Review 6,
  • 1996

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