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On variance bounds for asset price changes

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  • Lansing, Kevin J.

Abstract

In this paper, I consider variance bounds for stock price changes in a general setting that allows for ex-dividend stock prices, risk-averse investors, and exponentially growing dividends. I show that providing investors with more information about future dividends can either increase or decrease the variance of stock price changes, depending on key parameters, namely, those governing the properties of dividends and the stochastic discount factor. This finding contrasts with the results of Engel (2005), who shows that news about future dividends will always decrease the variance of stock price changes in a specialized setting with cum-dividend stock prices and risk-neutral investors.

Suggested Citation

  • Lansing, Kevin J., 2016. "On variance bounds for asset price changes," Journal of Financial Markets, Elsevier, vol. 28(C), pages 132-148.
    • Handle: RePEc:eee:finmar:v:28:y:2016:i:c:p:132-148
    DOI: 10.1016/j.finmar.2015.06.002
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    References listed on IDEAS

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    2. Engel, Charles, 2014. "Exchange Rates and Interest Parity," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 453-522, Elsevier.
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    Cited by:

    1. Lansing, Kevin J. & LeRoy, Stephen F. & Ma, Jun, 2022. "Examining the sources of excess return predictability: Stochastic volatility or market inefficiency?," Journal of Economic Behavior & Organization, Elsevier, vol. 197(C), pages 50-72.
    2. Lansing, Kevin J., 2024. "Replicating business cycles and asset returns with sentiment and low risk aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 167(C).
    3. Fredj Jawadi & Georges Prat, 2017. "Equity prices and fundamentals: a DDM–APT mixed approach," Review of Quantitative Finance and Accounting, Springer, vol. 49(3), pages 661-695, October.

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    More about this item

    Keywords

    Asset pricing; Excess volatility; Variance bounds; Risk aversion;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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