Volatility of US Stock Prices

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 which makes an extreme information assumption. We go on to test a weaker definition of efficient markets, due to Jensen (8). We show the existence of a profitable trading rule and so conclude that stock prices are too volatile, even when judged by this weaker definition, although the magnitude of this excess volatility is much less striking. 

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