Mean Reversion and the Permanent Income Hypothesis
By Bryan Caplan
Here’s a question from my last Ph.D. Microeconomics exam. Post your answers in the comments, and I’ll share my suggested answer tomorrow.
Suppose you – and
you alone – discover that the stock market is mean-reverting.
True, False, and Explain: If you are rational, you will NOT obey the
permanent income hypothesis.
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