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Econometric Aspects of the Variance-Bounds Tests: A Survey

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  • Gilles, Christian
  • LeRoy, Stephen F

Abstract

We survey the variance-bounds tests of asset-price volatility, stressing the econometric aspects of these tests. The first variance-bounds tests of the present-value relation reported apparently striking evidence of excess volatility of asset prices. The statistical significance of the results, however, was either marginal or, in the case of model-free tests, impossible to assess. Moreover, the tests were soon criticized for a number of biases. Various other tests of the present-value relations were later developed, avoiding in different degrees the econometric problems attending the first-generation tests also found excess volatility, though sometimes of borderline statistical significance. This finding of excess volatility is robust and is difficult to explain within the representative-consumer, frictionless-market model. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 4 (1991)
Issue (Month): 4 ()
Pages: 753-91

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Handle: RePEc:oup:rfinst:v:4:y:1991:i:4:p:753-91

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Cited by:
  1. Refet S. G├╝rkaynak, 2005. "Econometric tests of asset price bubbles: taking stock," Finance and Economics Discussion Series 2005-04, Board of Governors of the Federal Reserve System (U.S.).
  2. Lof, Matthijs, 2012. "Rational Speculators, Contrarians and Excess Volatility," MPRA Paper 43490, University Library of Munich, Germany.
  3. Tim Bollerslev & Robert J. Hodrick, 1992. "Financial Market Efficiency Tests," NBER Working Papers 4108, National Bureau of Economic Research, Inc.
  4. Leonardo Bartolini & Alessandro Prati, 1998. "Soft exchange rate bands and speculative attacks: theory and evidence from the ERM since August 1993," Staff Reports 43, Federal Reserve Bank of New York.
  5. Charles Engel, 2004. "Some New Variance Bounds for Asset Prices," NBER Working Papers 10981, National Bureau of Economic Research, Inc.
  6. Marian Berneburg, 2006. "Excess Volatility in European Equity Style Indices - New Evidence," IWH Discussion Papers 16, Halle Institute for Economic Research.
  7. Deb, Pragyan & Koo, Bonsoo & Liu, Zijun, 2014. "Competition, premature trading and excess volatility," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 178-193.
  8. Garrett H. TeSelle, 1998. "Bubbles or noise? Reconciling the results of broad-dividend variance-bounds tests," Finance and Economics Discussion Series 1998-42, Board of Governors of the Federal Reserve System (U.S.).

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