Empirical Validation on Excess Volatility Puzzle

Article Sidebar

PDF
Published: Apr 15, 2020
   Page: 42-48

Main Article Content

Alireza Fallahi
Department of Mathematics and Computer Science, Amirkabir University of Technology, Tehran, Iran.
Safoora Zarei
ECO College of Insurance, Allameh Tabatabai University, Tehran, Iran.

Abstract

We study the excess volatility puzzle observed in the market by comparing the volatility of S&P 500 and 10-year Treasury yield over the sample period of 2013 to 2019. To estimate the volatility of stock and bond returns, we apply three different methods to check the puzzle: (1) historical volatility; (2) volatility indices and (3) econometrics models. Under normal and independent assumptions for returns of stocks and bonds, we derive a variation measure to check the puzzle. The results of the three models show the variance of the excess return of stock and bond is time changing. The time-varying of the variance of excess return demonstrates the inefficiency of markets due to predictably of excess return over time.

Keywords:
Excess volatility puzzle, market efficiency, econometrics model, volatility index, rolling window estimation.

Article Details

How to Cite
Fallahi, A., & Zarei, S. (2020). Empirical Validation on Excess Volatility Puzzle. Asian Journal of Economics, Finance and Management, 2(1), 42–48. Retrieved from https://www.globalpresshub.com/index.php/AJEFM/article/view/822
Issue
2020 - Volume 2 [Issue 1]
Section
Original Research Article

References

Campbell JY, Cochrane JH. By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of Political Economy. 1999;107(2):205–251.

Mehra R, Prescott E. The equity premium: A puzzle. Journal of Monetary Economics. 1985;15:145–161.

Fama FE, French RK. Dividend yields and expected stock returns. Journal of Financial Economics. 1988;22: 3–25.

Shirvani A, Rachev S, Fabozzi FJ. A rational finance explanation of the stock predictability puzzle. 2019a;arXiv: 1911.02194.

Lundtofte F, Wilhelmsson A. Risk premia: Exact solutions vs. log-linear approximations. Journal of Banking & Finance. 2013;37:4256–4264.

Shirvani A, Stoyanov SV, Fabozzi FJ, Rachev ST. Equity premium puzzle or faulty economic modelling? 2019b; arXiv:1909.13019.

Shiller RJ. Do stock prices move too much to be justified by subsequent changes in dividends? American Economic Review. 1981;71(3):421–435.

LeRoy SF, Porter RD. Tests based on implied variance bounds. Journal of Financial Economics. 1981;49(3):555–574.

Shiller RJ. From efficient market theory to behavioral finance. Journal of Economic Perspectives. 2003;17:83–104.

Ang A, Hodrick R, Xing Y, Zhang X. The cross-section of volatility and expected returns. Journal of Finance. 2006;61(1): 259–299.

LeRoy SF, Lansing KJ. Capital market efficiency: A reinterpretation. Technical Report, Department of Economics, University of California, Santa Barbara. 2006;28.

Rachev S, Stoyanov S, Mittnik S, Fabozzi FJ, Shirvani A. Behavioral finance – asset prices predictability, equity premium puzzle, volatility puzzle: The rational finance approach; 2017.

Kandel S, Stambaugh RF. On the predictability of stock returns: An asset-allocation perspective. Journal of Finance. 1996;51:385–424.

Siami-Namini S. Volatility transmission among oil price, exchange rate and agricultural commodities prices. Applied Economics and Finance. 20019;6(4):41–61.

Kocherlakota N. The equity premium: It is still a puzzle. Journal of Economic Literature. 1996; 40:42–711.

Hamilton WA. Time series analysis. Princeton University Press, Princeton, N.J; 1994.

Markowitz HM. Portfolio selection. Journal of Finance. 1952;7(1):77–91.

Ng ST, Fan RY, Wong JM. An econometric model for forecasting private construction investment in Hong Kong. Construction Management and Economics. 2011;29(5):519– 534.

Mortazavi SMB, Shiri N, Javadi M, Dehnavi SD. Optimal planning and management of hybrid vehicles in smart grid. Journal of Ciencia & Natura. 2015;37:253–263.

Ghaedi A, Dehnavi SD, Fotoohabadi H. Probabilistic scheduling of smart electric grids considering plug-in hybrid electric vehicles. Journal of Intelligent & Fuzzy Systems. 2019;1: 1–12.

Shirvani A, Volchenkov D. A regulated market under sanctions: On tail dependence between oil, gold, and tehran stock exchange index. Journal of Vibration Testing and System Dynamics. 2019;3(3): 297–311.

Mostafa FB, Hossain S. Revisiting the performance of PCA versus FDA versus Simple Projection for Image Recognition; 2020.

Siami-Namini S, Hudson D, Trindade A, Lyford C. Commodity price volatility and us monetary policy: Commodity price overshooting revisited. Agribusiness an International Journal. 2019;35 (2):200–218.