Premium
Volatility of stock prices and market efficiency
Author(s) -
Kumar Raman,
Makhija Anil K.
Publication year - 1986
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090070208
Subject(s) - dividend , economics , random walk , econometrics , volatility (finance) , stock (firearms) , random walk hypothesis , efficient market hypothesis , financial economics , stock market , stock price , series (stratigraphy) , mathematics , statistics , finance , mechanical engineering , paleontology , horse , engineering , biology
Recently, historical price series along with the dividend series have been used to severely question the Efficient Markets Hypothesis. The literature suggests that the stock prices vary too much to be explained by subsequent changes in dividends. It is argued in this paper that these results require the assumption of stationarity of the price process and that this assumption is not compatible with the random walk model of Efficient Markets. A non‐stationary dividend process, which is compatible with the random walk model of Efficient Markets, results in a reversal of earlier results. The new results are shown to be consistent with the empirical findings. Simulations are run to verify the results.