Volatility tests and efficient markets : A review essay
AbstractThis essay examines what volatility tests tell us about the data and what implications we should derive from them. It argues that volatility tests do not tell us that "prices are too volatile", implying that "markets are inefficient", but rather that "(discounted) returns are forecastable", implying that "current discount rate models leave a residual". It also argues that the discount rate residuals documented by volatility tests (and equivalent return forecasting regressions or Euler equation tests) are suggestive of rational, business cycle-induced discount rate movements, rather than "fads" or other inefficiencies.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 27 (1991)
Issue (Month): 3 (June)
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Web page: http://www.elsevier.com/locate/inca/505566
Other versions of this item:
- John H. Cochrane, 1992. "Volatility Tests and Efficient Markets: A Review Essay," NBER Working Papers 3591, National Bureau of Economic Research, Inc.
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- N. Gregory Mankiw & David H. Romer & Matthew D. Shapiro, 1989.
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"Explaining the Variance of Price-Dividend Ratios,"
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