IDEAS home Printed from https://ideas.repec.org/a/mcb/jmoncb/v37y2005i5p949-55.html
   My bibliography  Save this article

Some New Variance Bounds for Asset Prices

Author

Listed:
  • Engel, Charles

Abstract

When equity prices are determined as the discounted sum of current and expected future dividends, Shiller (1981) and LeRoy and Porter (1981) derived a relationship between the variance of the price of equities, p[subscript t] and the variance of the ex post realized discounted sum of current and future dividends: p[superscript * subscript t]: Var(p[superscript * subscript t]) >= Var(p[subscript t]). The literature has long since recognized that this variance bound is valid only when dividends follow a stationary process. Others, notably West (1988), derive variance bounds that apply when dividends are nonstationary. West shows that the variance in innovations in p[subscript t] must be less than the variance of innovations in a forecast of the discounted sum of current and future dividends constructed by the econometrician, p-hat[subscript t]. Here we derive a new variance bound when dividends are stationary or have a unit root, that sheds light on the discussion in the 1980s of the Shiller variance bound: Var(p[subscript t] - p[subscript t - 1]) >= Var(p[superscript * subscript t] - p[superscript * subscript t - 1])! We also derive a variance bound related to the West bound: Var(p-hat[subscript t] - p-hat[subscript t - 1]) >= Var(p[subscript t] - p[subscript t - 1]).

Suggested Citation

  • Engel, Charles, 2005. "Some New Variance Bounds for Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 949-955, October.
  • Handle: RePEc:mcb:jmoncb:v:37:y:2005:i:5:p:949-55
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below 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.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Flavin, Marjorie A, 1983. "Excess Volatility in the Financial Markets: A Reassessment of the Empirical Evidence," Journal of Political Economy, University of Chicago Press, vol. 91(6), pages 929-956, December.
    2. Mankiw, N Gregory & Romer, David & Shapiro, Matthew D, 1985. " An Unbiased Reexamination of Stock Market Volatility," Journal of Finance, American Finance Association, vol. 40(3), pages 677-687, July.
    3. Charles Engel & Kenneth D. West, 2005. "Exchange Rates and Fundamentals," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 485-517, June.
    4. Marsh, Terry A & Merton, Robert C, 1986. "Dividend Variability and Variance Bounds Tests for the Rationality ofStock Market Prices," American Economic Review, American Economic Association, vol. 76(3), pages 483-498, June.
    5. Gilles, Christian & LeRoy, Stephen F, 1991. "Econometric Aspects of the Variance-Bounds Tests: A Survey," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 753-791.
    6. Frankel, Jeffrey A. & Stock, James H., 1987. "Regression vs. volatility tests of the efficiency of foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 49-56, March.
    7. Charles Engel & Kenneth D. West, 2004. "Accounting for Exchange-Rate Variability in Present-Value Models When the Discount Factor Is Near 1," American Economic Review, American Economic Association, vol. 94(2), pages 119-125, May.
    8. Shiller, Robert J, 1988. "The Probability of Gross Violations of a Present Value Variance Inequality," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 1089-1092, October.
    9. Kleidon, Allan W, 1988. "The Probability of Gross Violations of a Present Value Variance Inequality: Reply," Journal of Political Economy, University of Chicago Press, vol. 96(5), pages 1093-1096, October.
    10. Durlauf, Steven N & Phillips, Peter C B, 1988. "Trends versus Random Walks in Time Series Analysis," Econometrica, Econometric Society, vol. 56(6), pages 1333-1354, November.
    11. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-436, June.
    12. Kleidon, Allan W, 1986. "Variance Bounds Tests and Stock Price Valuation Models," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 953-1001, October.
    13. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-574, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Engel, Charles, 2014. "Exchange Rates and Interest Parity," Handbook of International Economics, Elsevier.
    2. Drobyshevsky Sergey & Narkevich Sergey & E. Pikulina & D. Polevoy, 2009. "Analysis Of a Possible Bubble On the Russian Real Estate Market," Research Paper Series, Gaidar Institute for Economic Policy, issue 128.
    3. Djeutem, Edouard & Kasa, Kenneth, 2013. "Robustness and exchange rate volatility," Journal of International Economics, Elsevier, vol. 91(1), pages 27-39.
    4. Lansing, Kevin J., 2016. "On variance bounds for asset price changes," Journal of Financial Markets, Elsevier, vol. 28(C), pages 132-148.
    5. Lansing, Kevin J. & LeRoy, Stephen F., 2014. "Risk aversion, investor information and stock market volatility," European Economic Review, Elsevier, vol. 70(C), pages 88-107.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mcb:jmoncb:v:37:y:2005:i:5:p:949-55. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879 .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.