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Trading Rules and Excess Volatility

Published online by Cambridge University Press:  06 April 2009

George Bulkley and
Ian Tonks
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Abstract

A number of recent papers have reported evidence that stock prices are more volatile than is consistent with efficient markets. We argue that the excess volatility tests address a definition of efficient markets that makes an extreme information assumption. We go on to test a weaker definition of efficient markets, due to Jensen (1978). We show the existence of a profitable trading rule that earns a significantly higher rate of return than a buy-and-hold strategy, and so conclude that stock prices are too volatile, even when judged by this weaker definition.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 3 , September 1992, pp. 365 - 382
Copyright
Copyright © School of Business Administration, University of Washington 1992

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