The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Excess Volatility Tests

  • Stephen F. LeRoy
Reference work entry


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.


Asset pricing Equity premium puzzle Excess volatility tests Payoff volatility Present value Price volatility Price–consumption ratio Risk aversion Risk neutrality Samuelson, P. Vector autoregressions 

JEL Classifications

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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Stephen F. LeRoy
    • 1
  1. 1.