Working Paper: NBER ID: w22045
Authors: Stefano Giglio; Bryan Kelly
Abstract: We document a form of excess volatility that is irreconcilable with standard models of prices, even after accounting for variation in discount rates. We compare prices of claims on the same cash flow stream but with different maturities. Standard models impose precise internal consistency conditions on the joint behavior of long and short maturity claims and these are strongly rejected in the data. In particular, long maturity prices are significantly more variable than justified by the behavior at short maturities. Our findings are pervasive. We reject internal consistency conditions in all term structures that we study, including equity options, currency options, credit default swaps, commodity futures, variance swaps, and inflation swaps.
Keywords: excess volatility; asset pricing; term structure; no-arbitrage models
JEL Codes: G02; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| excess volatility in long maturity prices (G19) | price fluctuations at the long end of the term structure (E43) |
| price fluctuations at the long end of the term structure (E43) | overreaction to short maturity price fluctuations (G19) |
| short maturity price fluctuations (G13) | excess volatility in long maturity prices (G19) |
| excess volatility in long maturity prices (G19) | mispricing in the market (G19) |
| movements in discount rates (E43) | excess volatility in long maturity prices (G19) |