Volatility Tests and Efficient Markets: A Review Essay

33 Pages Posted: 8 Jan 2008 Last revised: 26 Oct 2022

See all articles by John H. Cochrane

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER)

Date Written: January 1991


This essay examines what volatility tests tell us about the data and what implications we should derive from them. It argues that volatility tests do not tell us that "prices are too volatile", implying that "markets are inefficient", but rather that "(discounted) returns are forecastable", implying that "current discount rate models leave a residual". It also argues that the discount rate residuals documented by volatility tests (and equivalent return forecasting regressions or Euler equation tests) are suggestive of rational, business cycle-induced discount rate movements, rather than "fads" or other inefficiencies.

Suggested Citation

Cochrane, John H., Volatility Tests and Efficient Markets: A Review Essay (January 1991). NBER Working Paper No. w3591, Available at SSRN: https://ssrn.com/abstract=471546

John H. Cochrane (Contact Author)

Hoover Institution ( email )

Stanford, CA 94305-6010
United States
6507236708 (Phone)

HOME PAGE: http://www.johnhcochrane.com/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States