Volatility Tests and Efficient Markets: A Review Essay / John H. Cochrane.

Format:

Book

Author/Creator:

Cochrane, John H.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3591.

NBER working paper series no. w3591

Language:

English

Subjects (All):

Mathematical models.

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Volatility Tests and Efficient Markets

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1991.

Cambridge, Mass. : National Bureau of Economic Research, 1991.

Summary:

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.

Notes:

Print version record

January 1991.

Includes bibliographical references.