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Full-Text Articles in Social and Behavioral Sciences
Actual And Warranted Relations Between Asset Prices, Andrea E. Beltratti, Robert J. Shiller
Actual And Warranted Relations Between Asset Prices, Andrea E. Beltratti, Robert J. Shiller
Cowles Foundation Discussion Papers
Efficient markets models assert that the price of each asset is equal to the optimal forecast of its ex-post or fundamental value. These models do not imply, however, that the covariance between two asset prices is given by the covariance between the ex-post values they respectively forecast: these two covariances can even have opposite signs. However, it is possible to place bounds on the covariance between asset prices given the covariance matrix of ex-post values. We present such bounds for both covariances and correlations and show how such bounds can be tightened using information beyond the covariance matrix of ex-post …