NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Volatility Tests and Efficient Markets: A Review Essay

John H. Cochrane

NBER Working Paper No. 3591 (Also Reprint No. r1701)
Issued in January 1991
NBER Program(s):   EFG   ME

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.

download in pdf format
   (440 K)

download in djvu format
   (226 K)

email paper

This paper is available as PDF (440 K) or DjVu (226 K) (Download viewer) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3591

Published: Journal of Monetary Economics, Vol. 27, pp.463-485, (1991).

Users who downloaded this paper also downloaded these:
Cochrane w3157 Explaining the Variance of Price Dividend Ratios
Shiller w0456 Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?
Bollerslev and Hodrick w4108 Financial Market Efficiency Tests
Shiller w0565 The Use of Volatility Measures in Assessing Market Efficiency
Frankel and Stock w1105 A Relationship Between Regression Tests and Volatility Tests of Market ncy
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us