Abstract
Stock prices frequently undergo big changes that do not coincide with commensurate changes in fundamentals (earnings, dividends, interest rates). Shiller and LeRoy and Porter formalized the idea that price volatility is excessive relative to fundamentals by deriving the implications for price volatility of the hypothesis that stock prices equal the present value of discounted dividends. Subsequent discussion focused on the extent to which their results were subject to econometric problems. Also, analysts observed that the adopted version of the present-value model presumed constant discount rates, as would be the case under risk neutrality. This possibly biases the results.
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LeRoy, S.F. (2018). Excess Volatility Tests. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95189-5_2307
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DOI: https://doi.org/10.1057/978-1-349-95189-5_2307
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