Volatility Tests and Efficient Markets: A Review Essay
This 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.
|Date of creation:||Jan 1991|
|Date of revision:|
|Publication status:||published as Journal of Monetary Economics, Vol. 27, pp.463-485, (1991).|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
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"Stock Market Forecastability and Volatility: A Statistical Appraisal,"
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- N. Gregory Mankiw & David H. Romer & Matthew D. Shapiro, 1989. "Stock Market Forecastability and Volatility: A Statistical Appraisal," NBER Working Papers 3154, National Bureau of Economic Research, Inc.
- Mankiw, N.G. & Romer, D. & Shapiro, M.D., 1989. "Stock Market Forecastability And Volatility: A Statistical Appraisal," Papers 89-21, Michigan - Center for Research on Economic & Social Theory.
- Sanford J. Grossman, 1981. "An Introduction to the Theory of Rational Expectations Under Asymmetric Information," Review of Economic Studies, Oxford University Press, vol. 48(4), pages 541-559.
- Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November.
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