Working Paper: NBER ID: w2362
Authors: Kenneth A. Froot
Abstract: Simple regression tests that have power against the alternatives that. asset prices and expected future asset returns are excessively volatile are developed and performed for the foreign exchange and stock markets. These tests have a number of advantages over alternative, variance hounds techniques. We find evidence that. both exchange rates and stock prices are excessively volatile and that expected returns on foreign exchange and stocks move too much. We also investigate whether these findings ran he attributed to time-varying risk premia, but in our tests the data provide little support for such an alternative hypothesis.
Keywords: Excess volatility; Forecasting; Foreign exchange; Stock markets
JEL Codes: E44; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Exchange rates (F31) | excessive volatility (E32) |
| Stock prices (G19) | excessive volatility (E32) |
| Expected returns on foreign exchange (F31) | excessive volatility (E32) |
| Expected returns on stocks (G17) | excessive volatility (E32) |