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 InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3591.
Date of creation: Jan 1991
Date of revision:
Publication status: published as Journal of Monetary Economics, Vol. 27, pp.463-485, (1991).
Note: EFG ME
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Other versions of this item:
- Cochrane, John H., 1991. "Volatility tests and efficient markets : A review essay," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 463-485, June.
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