Efficient Market Hypothesis: Keynesian Approach

Efficient Market Hypothesis: Keynesian Approach

The paper proposes a formal notion of Keynesian efficient market hypothesis(KEMH). The notion of KEMH enables us to clarify the difficulty Keynes described in Keynes(1936). In particular, under a certain condition there are multiple equilibrium asset prices. Whether the market has multiple equilibria depends on the interaction between two uncertainties, the uncertainty due to an exogenously determined fundamental stochastic parameter and the uncertainty as to the expectations of the agents who transact with the firm. When the former uncertainty dominates the latter, the equilibrium is characterized as in the standard EMH while when the latter dominates the former we obtain multiple equilibria.