THE BEHAVIOR OF UK STOCK-PRICES AND RETURNS - IS THE MARKET EFFICIENT

The VAR methodology of Campbell and Shiller !(1989) is employed under four different assumptions regarding equilibrium expected returns to a ssess the efficiency of the UI; stock market. In our first model. equi librium expected (real) returns are assumed to be constant, while in t he second model. excess returns are assumed to be constant. The next t wo models assume that equilibrium returns depend upon a time-varying r isk premium which varies with tile conditional expectation of the retu rn variance (i.e. the CAPM). Our results yield evidence of short-termi sm, even when the key assumption of a time-invariant discount rate is relaxed.