The Use of Volatility Measures in Assessing Market Efficiency* ROBERT J. SHILLER** I. Introduction RECENTLY a number of studies have used measures of the variance or âvolatilityâ of speculative asset prices to provide evidence against simple models of market efficiency. These measures were interpreted as implying that prices show too much variation to be explained in terms of the random arrival of new information about the fundamental determinants of price. The first such use of the volatility measures was made independently by LeRoy and Porter [198l] in connection with stock price and earnings data, and myself , in connection with longterm and short-term bond yields. Subsequently, further use of these measures was made to study efficient markets models involving stock prices and dividends (Shiller [1981b]), yields on intermediate and short-term bonds (Shiller [1981a], Singleton ), preferred stock dividend price ratios and short-term interest rates (Amsler ) and foreign exchange rates and money stock differentials (Huang , Meese and Singleton ). My intent here is to interpret the use of volatility measures in these papers, to describe some alternative models which might allow more variation in prices, and to contrast the volatility tests with more conventional methods of evaluating
The Journal of Finance – Wiley
Published: May 1, 1981
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