Excess Volatility: Beyond Discount Rates

70 Pages Posted: 6 Mar 2015 Last revised: 30 Jul 2019

See all articles by Stefano Giglio

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 17, 2017

Abstract

We document a form of excess volatility that is difficult to reconcile 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, discount rates, term structure

JEL Classification: G10, G02

Suggested Citation

Giglio, Stefano and Kelly, Bryan T., Excess Volatility: Beyond Discount Rates (January 17, 2017). Fama-Miller Working Paper; Chicago Booth Research Paper No. 15-13. Available at SSRN: https://ssrn.com/abstract=2574082 or http://dx.doi.org/10.2139/ssrn.2574082

Stefano Giglio

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Bryan T. Kelly (Contact Author)

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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