We examine the effects of introducing stochastic shocks into a linear rational expectations model with saddlepoint dynamics generated by a forward-looking asset price. We derive the fundamental differential equation governing the path of the asset price as a function of the quot;sluggishquot;...

When the risk premium in the US stock market fell far below its historic level, Shiller (2000) attributed this to a bubble driven by psychological factors. As an alternative explanation, we point out that the observed risk premium may be reduced by one-sided intervention policy on the part of...

The risk premium in the US stock market has fallen far below its historic level, which Shiller (2000) attributes to a bubble driven by psychological factors. As an alternative explanation, we point out that the observed risk premium may be reduced by one-sided intervention policy on the part of...

The risk premium in the US stock market has fallen far below its historic level, which Shiller (2000) attributes to a bubble driven by psychological factors. As an alternative explanation, we point out that the observed risk premium may be reduced by one-sided intervention policy on the part of...

When the risk premium in the US stock market fell substantially, Shiller (2000) attributed this to a bubble driven by psychological factors. An alternative explanation is that the observed risk premium may be reduced by one-sided intervention policy on the part of the Federal Reserve which leads...

This paper is one of four in this Working Paper Series, focusing on financial liberalisation, along with those of Kupiec, Driscoll and Blundell-Wignall and Browne. It surveys recent work, both theoretical and empirical, on the question of market efficiency in various asset markets. A number of...

Exchange rate behavior is analyzed in the context of a stochastic rational expectations model in which there are random shocks to the price setting mechanism and in which the authorities choose to impose either nominal or real exchange rate bands. Results are compared to those that emerge from a...