Working Paper: NBER ID: w0456
Authors: Robert J. Shiller
Abstract: This paper will develop the efficient markets model in Section I to clarify some theoretical questions that may arise in connection with the inequality (1) and some similar inequalities will be derived that put limits on the standard deviation of the innovation in price and the standard deviation of the change in price. The model is restated in innovation form which allows better understanding of the limits on stock price volatility imposed by the model. In particular, this will enable us to see (Section II) that the standard deviation of p is highest when information about dividends is revealed smoothly and that if information is revealed in big lumps occasionally the price series may have higher kurtosis (fatter tails) but will have lower variance. The notion expressed by some that earnings rather than dividend data should be used is discussed in Section III, and a way of assessing the importance of time variation in real discount rates is shown in Section IV. The inequalities are compared with the data in Section V.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| expected future dividends (d) (G35) | stock prices (p) (G19) |
| stock prices (p) (G19) | forecast errors (u) (C53) |
| stock prices (p) (G19) | actual market behavior (D40) |
| changes in dividends (G35) | stock prices (p) (G19) |
| predicted volatility of stock prices (G17) | actual volatility of stock prices (G17) |