Contingency and Markets
ACCORDING TO OUR IKE model, prices and risk tend to undergo swings when trends in fundamentals persist for some time, which they do quite often, and market participants have no specific reasons to expect a change, and thus they are likely to revise their forecasting strategies in guardedly moderate ways. We would expect, therefore, that fundamental factors play an important role in driving asset-price swings and risk. We would also expect the set of fundamental factors and their influences to change over time.
Yet nearly all of the literally thousands of empirical studies make no allowance for any change in the way that fundamentals might matter for monthly or quarterly movements in asset prices. Instead, these studies estimate statistical models with fixed parameters over long stretches of time (in many cases, decades). Unsurprisingly, these empirical studies fail to find evidence that fundamentals matter.
The only sensible conclusion to draw from such fixedparameter studies is that looking for overarching relationships in asset markets is futile. Instead, economists have largely concluded that factors other than fundamentals must move markets. Those who argue that bubbles and irrationality drive asset prices routinely appeal to these results to support their position.
Economists who continue to embrace the Efficient Market Hypothesis largely recognize that “we don’t have … [a Rational Expectations] model yet” (Cassidy, 2010b, p. 3) that can account