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Trading Rules and Excess Volatility

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  • Bulkley, George
  • Tonks, Ian

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.

Suggested Citation

  • Bulkley, George & Tonks, Ian, 1992. "Trading Rules and Excess Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(3), pages 365-382, September.
    • Handle: RePEc:cup:jfinqa:v:27:y:1992:i:03:p:365-382_00
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    Cited by:

    1. Rambaccussing, Dooruj, 2010. "A real-time trading rule," MPRA Paper 27148, University Library of Munich, Germany.
    2. Snell, Andy & Tonks, Ian & Bulkley, George, 1996. "Excessive stock price dispersion: a regression test of cross-sectional volatility," LSE Research Online Documents on Economics 119165, London School of Economics and Political Science, LSE Library.
    3. Quaye, Enoch & Tunaru, Radu, 2022. "The stock implied volatility and the implied dividend volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 134(C).
    4. Rambaccussing, Dooruj, 2009. "Exploiting price misalignements," MPRA Paper 27147, University Library of Munich, Germany.

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