Learning-Induced Securities Price Volatility
AbstractThis paper tests whether the high average returns on the S&P 500 index in recent history can be attributed to mistaken expectations (the ex-ante risk premium -- taken to be constant -- is systematically less than the ex-post measured risk premium), or, alternatively, whether can they be explained as the result of selection bias (the U.S. experience is exceptional). The tests reject these hypotheses over the periods 1/81 to 12/97 (p = 0.02), and 1/41-12/60 (p = 0.03). They do not reject over the periods 1/28-12/40 and 1/61-12/80. The tests are based on a bound that the ex-post Sharpe ratios impose on the volatility of the ratio of the market's prior and posterior beliefs about future outcomes. The bound derives from a property of Bayesian learning first noted in an earlier paper. Qualitatively, for the bound not to be violated, higher absolute mean excess returns may need to be accompanied with higher volatility. This should be interpreted as predicting that large price movements (positive as well as negative) may have to be erratic. We confirm this prediction for the S&P 500 data.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 299.
Date of creation: 05 Jul 2000
Date of revision:
Contact details of provider:
Postal: CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain
Fax: +34 93 542 17 46
Web page: http://enginy.upf.es/SCE/
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Larry G. Epstein & Martin Schneider, 2008.
"Ambiguity, Information Quality, and Asset Pricing,"
Journal of Finance,
American Finance Association, vol. 63(1), pages 197-228, 02.
- Larry Epstein & Martin Schneider, 2005. "Ambiguity, Information Quality and Asset Pricing," RCER Working Papers 519, University of Rochester - Center for Economic Research (RCER).
- Larry Epstein & Martin Schneider, 2004. "Ambiguity, Information Quality and Asset Pricing," RCER Working Papers 507, University of Rochester - Center for Economic Research (RCER).
- Larry Epstein & Martin Schneider, 2002.
"Learning Under Ambiguity,"
RCER Working Papers
497, University of Rochester - Center for Economic Research (RCER), revised Mar 2005.
- Consiglio, Andrea & Russino, Annalisa, 2007. "How does learning affect market liquidity? A simulation analysis of a double-auction financial market with portfolio traders," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 1910-1937, June.
- Massa, Massimo & Simonov, Andrei, 2005. "Is learning a dimension of risk?," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2605-2632, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.