Excess Volatility: Beyond Discount Rates. Issue 1 (26th August 2017)

• Record Type: Journal Article
• Authors: Giglio, Stefano; Kelly, Bryan
• Is Part Of: Quarterly journal of economics. Volume 133:Issue 1(2018)
• Page Start: 71
• Page End: 127
• Publication Date: 2017-08-26
• Subjects: Economics -- Periodicals; 330.05
• DOI: 10.1093/qje/qjx034
• Languages: English
• ISSNs: 0033-5533

Abstract

Abstract: We document a form of excess volatility that is difficult to reconcile with standard models of prices, even after accounting for variation in discount rates. We compare prices of claims on the same cash flow stream but with different maturities. Standard models impose precise internal consistency conditions on the joint behavior of long- and short-maturity claims and these are strongly rejected in the data. In particular, long-maturity prices are significantly more variable than justified by the behavior at short maturities. We reject internal consistency conditions in all term structures that we study, including equity options, currency options, credit default swaps, commodity futures, variance swaps, and inflation swaps.