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Beyond Mechanical Markets by Michael D. Goldberg, Roman Frydman

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11

Contingency and Markets

ACCORDING TO OUR IKE model, prices and risk tend to undergo swings when trends in fundamentals persist for some time, which they do quite often, and market participants have no specific reasons to expect a change, and thus they are likely to revise their forecasting strategies in guardedly moderate ways. We would expect, therefore, that fundamental factors play an important role in driving asset-price swings and risk. We would also expect the set of fundamental factors and their influences to change over time.

Yet nearly all of the literally thousands of empirical studies make no allowance for any change in the way that fundamentals might matter for monthly or quarterly movements in asset prices. Instead, these studies ...

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