Tests of Excess Forecast Volatility in the Foreign Exchange and Stock Markets
Simple regression tests that have power against the alternatives that asset prices and expected future asset returns are excessively volatile are developed and performed for the foreign exchange and stock markets. These tests have a number of advantages over alternative, variance bounds techniques. We find evidence that both exchange rates and stock prices are excessively volatile and that expected returns on foreign exchange and stocks move too much. We also investigate whether these findings can be attributed to time-varying risk premia, but in our tests the data provide little support for such an alternative hypothesis.
Keywords: asset pricing;
Risk and Uncertainty;
Froot, K. A. "Tests of Excess Forecast Volatility in the Foreign Exchange and Stock Markets." NBER Working Paper Series, No. 2362, August 1987.