The Behaviour of UK Stock Prices and Returns: Is the Market Efficient?

The VAR methodology of J. Y. Campbell and R. J. Shiller (1989) is employed under four different assumptions regarding equilibrium expected returns to assess the efficiency of the U.K. stock market. In the authors' first model, equilibrium expected (real) returns are assumed to be constant, while in the second model, excess returns are assumed to be constant. The next two models assume that equilibrium returns depend upon a time-varying risk premium which varies with the conditional expectation of the return variance (i.e., the CAPM). The authors' results yield evidence of short-termism, even when the key assumption of a time-invariant discount rate is relaxed. Copyright 1997 by Royal Economic Society.