Abstract
This article aims at highlighting the relevance of the Efficient Market Hypothesis versus rational bubbles hypotheses in order to account for the Belgian financial history since 1837. We use unit roots and cointegration techniques (following the works of Diba and Grossman [1988] and Dwyer and Hafer [1990]) and apply them to long-run time series of real stock prices and dividends. Our results tend to reject any hypothesis of rational bubbles but show great evidence of cointegration between stock prices and dividends for the 19th century sample (1837–1900, yearly). There is no evidence of cointegration for the intermediate sample (1958–88, quarterly). As the absence of rational bubbles and the validity of the Efficient Market Hypothesis should imply cointegration, we conclude that the time-invariance of the theory is questionable.
Similar content being viewed by others
References
Adam, M. C.; Szafarz, A. "Speculative Bubbles and Financial Markets,"Oxford Economic Papers, 44, 1992, pp. 626–40.
Adam, M. C.; Farber, A.; Szafarz, A. "Volatilité des marchés financiers: chaos, irrationalité ou illusion d'optique?,"Gestion 2000, 5, 1995, pp. 161–76.
Blanchard, O. J. "Speculative Bubbles, Crashes, and Rational Expectations,"Economic Letters, 3, 1979, pp. 387–9.
Blanchard, O. J.; Watson, M. W. "Bubbles, Rational Expectations, and Financial Markets,"Crises in the Economic and Financial Structure, P. Wachtel, ed., Lexington, 1982.
Breusch, T. "Testing for Autocorrelation in Dynamic Linear Models,"Australian Economic Paper, 17, 1978, pp. 334–55.
Camerer, C. "Bubbles and Fads in Asset Prices: A Review of Theory and Evidence,"Journal of Economic Surveys, 3, 1989, pp. 3–41.
Campbell, J. Y.; Shiller, R.J. "Cointegration and Tests of Present Value Models,"Journal of Political Economy, 95, 51, 1987, pp. 1062–88.
Chlepner, B. S.Cent ans d'histoire sociale en Belgique, Bruxelles: Presses Universitaires de Bruxelles, 1958.
Diba, B. T. "Bubbles and Stock-price Volatility,"The Stock Market: Bubbles, Volatility, and Chaos, Proceedings of the Thirteenth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis, G. P. Dwyer; R. W. Hafer, eds., Boston/Dordrecht/London, 1990, pp. 9–26.
Diba, B. T.; Grossman, H. I. "On the Inception of Rational Bubbles,"Quarterly Journal of Economics, 8, 1987, pp. 697–700.
__. "Explosive Rational Bubbles in Stock Prices?,"American Economic Review, 78, 1988, pp. 520–9.
Dickey, D.; Fuller, W. "Distribution of the Estimators for Autoregressive Series with a Unit Root,"Journal of the American Statistical Association, 74, 1979, pp. 427–31.
__. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root,"Econometrica, 49, 1981, pp. 1057–72.
Drappier, J. M. "La conjoncture des cours des valeurs mobilières, de leurs dividendes et des taux d'intérêt en Belgique de 1830 à 1913,"Bulletin de l'Institut des Sciences Economiques, August 1937, pp. 391–439.
Dwyer, G. P.; Hafer, R. W. "Do Fundamentals, Bubbles or Neither Determine Stock Prices? Some International Evidence,"The Stock Market: Bubbles, Volatility and Chaos, Proceedings of the 13th Annual Economic Policy Conference of the Federal Reserve of St. Louis, Boston/Dordrecht/London, 1990, pp. 31–68.
Engle, R. F.; Granger, C.W.J. "Cointegration and Error Correction: Representation, Estimation, and Testing,"Econometrica, 55, 1987, pp. 251–76.
Evans, G. W. "Pitfalls in Testing for Explosive Bubbles in Asset Prices,"American Economic Review, 81, 4, 1991, pp. 922–30.
Fama, E. F. "Efficient Capital Markets: A Review of Theoretical and Empirical Work,"Journal of Finance, 25, 1970, pp. 383–417.
Flament, F. "Un test de volatilité excessive sur des bourses européennes,"Cahiers Economiques de Bruxelles, 134, 2, 1992, pp. 167–87.
Flavin, M. A. "Excess Volatility in the Financial Markets: A Reassessment of the Empirical Evidence,"Journal of Political Economy, 91, 1983, pp. 929–56.
Johansen, S. "Statistical Analysis of Cointegration Vectors,"Journal of Economic Dynamics and Control, 12, 1988, pp. 231–54.
__ "Determination of Cointegration Rank in the Presence of a Linear Trend,"Oxford Bulletin of Economics and Statistics, 54, 1992, pp. 383–97.
Johansen, S.; Juselius, K. "Maximum Likelihood Estimation and Inference on Cointegration with Application to the Demand for Money,"Oxford Bulletin of Economics and Statistics, 52, 1990, pp. 169–210.
Kleidon, A. "Variance Bounds Tests and Stock Price Valuation Models,"Journal of Political Economy, 94, 1986, pp. 953–1001.
Kredietbank.Kredietbank General Market Index and Net Dividend Yield, Brussels: Kredietbank, June 1990.
Leroy, S. F.; Porter, R.D. "Stock Price Volatility: Tests based on Implied Variance Bounds,"Econometrica, 49, 1981, pp. 97–113.
Ljung, G. M.; Box, G.E. "On a Measure of Lack of Fit in Time Series Models,"Biometrika, 66, 1978, pp. 67–72.
Marsh, T. A.; Merton, R.C. "Dividend Variability and Variance Bounds Tests for the Rationality of Stock Price Markets,"American Economic Review, 76, 1986, pp. 483–98.
North, D. C.Institutions, Institutional Change and Economic Performance, Cambridge, MA: Cambridge University Press, 1990.
Orlean, A. "Mimetic Contagion and Speculative Bubbles,"Theory and Decision, 27, 1–2, 1989, pp. 63–92.
Quaden, G.L'économie belge dans la crise, Bruxelles: Ed. Labor, 1987.
Samuelson, P. A. "Proof that Properly Discounted Present Value of Assets Vibrate Randomly,"Bell Journal of Economics and Management Science, 4, 1973, pp. 369–74.
Schwarz, G. "Estimating the Dimension of a Model,"Annuals of Statistics, 6, 1978, pp. 461–4.
Shiller, R. J. "Do Stock Prices Move too Much to be Justified by Subsequent Changes in Dividends?,"American Economic Review, 71, 1981, pp. 421–5.
__.Market Volatility, Cambridge, MA: MIT Press, 1989.
Shreffrin, S. M.Rational Expectations, Cambridge, MA: Cambridge University Press, 1985.
Siaens, A. "La conjoncture des cours boursiers. Analyse du marché belge des actions (1952–1971),"Recherches Economiques de Louvain, 5, 1971, pp. 513–38.
West, K. D. "Dividend Innovation and Stock Price Volatility,"Econometrica, 56, 1988, pp. 37–61.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Demeulemeester, JL., Rochat, D. Long-run aggregate rationality: Some tests on the Belgian stock markets. International Advances in Economic Research 2, 423–433 (1996). https://doi.org/10.1007/BF02295467
Issue Date:
DOI: https://doi.org/10.1007/BF02295467