Irrational Movement of Share Prices:Evidences and Implications

There has been a long-standing debate in financial economics on the issue - whether share price movement can be justified by subsequent changes in future dividends. This paper attempts to test this hypothesis and reveals that stock price volatility over the period (1968-1991) appears to be far too high to be attributed to new information about future real dividends. Since price movement exceeds the level indicated by fundamental economic factors, the existence of ‘fads’ or ‘bubbles’ in price cannot be ignored. The ‘noisy’ price indulges misallocation of scarce resources and ultimately reduces the, welfare of the society.