The Behaviour 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 assess the efficiency of the UK stock market. In our 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). Our results yield evidence of short‐termism, even when the key assumption of a time‐invariant discount rate is relaxed.