Consensus Beliefs Equilibrium and Market Efficiency

Abstract

This paper presents an analysis of the concept of consensus beliefs and its relation to market efficiency. We show that unless traders have rational expectations, the two published interpretations of consensus beliefs are not useful for considerations of market efficiency. One interpretation (see Verrecchia6) has no implication for market efficiency. Under the second interpretation (see Verrecchia7,8) consensus beliefs equilibria are efficient, but they typically do not exist unless traders have rational expectations.