TY  - JOUR
AU  - Cochrane,John H.
TI  - Volatility Tests and Efficient Markets: A Review Essay
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3591
PY  - 1992
Y2  - March 1992
UR  - http://www.nber.org/papers/w3591
L1  - http://www.nber.org/papers/w3591.pdf
N1  - Author contact info:
John H. Cochrane
Booth School of Business
University of Chicago
5807 S. Woodlawn
Chicago, IL  60637
Tel: 773/702-3059
Fax: 773/702-0458
E-Mail: john.cochrane@chicagobooth.edu
AB  - 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.
ER  -