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Stock Market Forecastability And Volatility: A Statistical Appraisal

  • MANKIW, N.G.
  • ROMER, D.
  • SHAPIRO, M.D.

This paper presents and implements statistical tests of stock-market forecastability and volatility that are immune from the severe statistical problems of earlier tests. It finds that although the null hypothesis of market efficiency is rejected, the rejections are only marginal. The paper also shows how volatility tests and recent regression tests are closely related, and demonstrates that when finite sample biases are taken into account, regression tests also fail to provide strong evidence of violations of the conventional valuation model. Copyright 1991 by The Review of Economic Studies Limited.

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Paper provided by Michigan - Center for Research on Economic & Social Theory in its series Papers with number 89-21.

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Length: 39 pages
Date of creation: 1989
Date of revision:
Handle: RePEc:fth:michet:89-21
Contact details of provider: Postal: UNIVERSITY OF MICHIGAN, DEPARTMENT OF ECONOMICS CENTER FOR RESEARCH ON ECONOMIC AND SOCIAL THEORY, ANN ARBOR MICHIGAN U.S.A.

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  1. Kim, M.J. & Nelson, C.R. & Startz, R., 1988. "Mean Reversion In Stock Prices? A Reappraisal Of Empirical Evidence," Working Papers 88-15, University of Washington, Department of Economics.
  2. Pierre Perron & Robert J. Shiller, 1984. "Testing the Random Walk Hypothesis: Power Versus Frequency of Observation," Cowles Foundation Discussion Papers 732, Cowles Foundation for Research in Economics, Yale University.
  3. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  4. N. Gregory Mankiw & Matthew D. Shapiro, 1985. "Do We Reject Too Often? Small Sample Bias in Tests of Rational Expectations," Cowles Foundation Discussion Papers 743, Cowles Foundation for Research in Economics, Yale University.
  5. West, Kenneth D, 1987. "A Specification Test for Speculative Bubbles," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 553-80, August.
  6. Phillips, Peter C B, 1988. "Regression Theory for Near-Integrated Time Series," Econometrica, Econometric Society, vol. 56(5), pages 1021-43, September.
  7. Robert P. Flood & Robert J. Hodrick, 1986. "Asset Price Volatility, Bubbles, and Process Switching," NBER Working Papers 1867, National Bureau of Economic Research, Inc.
  8. Kenneth D. West, 1986. "Dividend Innovations and Stock Price Volatility," NBER Working Papers 1833, National Bureau of Economic Research, Inc.
  9. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
  10. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  11. Scott, Louis O, 1985. "The Present Value Model of Stock Prices: Regression Tests and Monte Carlo Results," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 599-605, November.
  12. Merton, Robert C., 1985. "On the current state of the stock market rationality hypothesis," Working papers 1717-85., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  13. White, Halbert & Domowitz, Ian, 1984. "Nonlinear Regression with Dependent Observations," Econometrica, Econometric Society, vol. 52(1), pages 143-61, January.
  14. N. Gregory Mankiw & David Romer & Matthew D. Shapiro, 1985. "An Unbiased Reexamination of Stock Market Volatility," Cowles Foundation Discussion Papers 758, Cowles Foundation for Research in Economics, Yale University.
  15. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May.
  16. Marsh, Terry A. & Merton, Robert C., 1984. "Dividend variability and variance bounds tests for the rationality of stock market prices," Working papers 1584-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  17. 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.
  18. Ackley, Gardner, 1983. "Commodities and Capital: Prices and Quantities," American Economic Review, American Economic Association, vol. 73(1), pages 1-16, March.
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