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Excess Stock Price Volatility as a Misspecified Euler Equation

Published online by Cambridge University Press:  06 April 2009

Wayne Joerding
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Abstract

Speculative bubbles have been offered to explain the excess volatility results by Shiller (1981) and LeRoy and Porter (1981). Recent work by Flood, Hodrick, and Kaplan has shown that rational speculative bubbles cannot be the explanation for the excess volatility results. This paper provides an analytical framework for examining the hypothesis that the simple present value model used for the excess volatility studies is a misspecification of the true model. The method is applied to data from a market index and four large corporations. The results are consistent with the hypothesis that the simple present value model is not the correct specification for stock market pricing.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 23 , Issue 3 , September 1988 , pp. 253 - 267
Copyright
Copyright © School of Business Administration, University of Washington 1988

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