Empirical Validation on Excess Volatility Puzzle

Alireza Fallahi and Safoora Zarei
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Alireza Fallahi: Department of Mathematics and Computer Science, Amirkabir University of Technology, Tehran, Iran.
Safoora Zarei: ECO College of Insurance, Allameh Tabatabai University, Tehran, Iran.

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Abstract: We study the excess volatility puzzle observed in the market by comparing the volatility of S&P 500 and 10-year Treasury yield over the sample period of 2013 to 2019. To estimate the volatility of stock and bond returns, we apply three different methods to check the puzzle: (1) historical volatility; (2) volatility indices and (3) econometrics models. Under normal and independent assumptions for returns of stocks and bonds, we derive a variation measure to check the puzzle. The results of the three models show the variance of the excess return of stock and bond is time changing. The time-varying of the variance of excess return demonstrates the inefficiency of markets due to predictably of excess return over time.

Date: 2020-04-15
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Published in Asian Journal of Economics, Finance and Management , 2020, 2 (1), pp.42-48

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05298590

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