ARE STOCK MARKETS EXCESSIVELY VOLATILE?

This essay by Robert Frewen is the kind of paper one should read before investing in the stock market and getting a premature heart attack (either from a huge unexpected loss, or from an equally high unexpected gain). The author addresses the issue of stock market volatility and tries to determine whether this volatility is justified or not by the market information. Robert provides a comprehensive review of the several conflicting perspectives on the subject, and concludes that in the case of excessive volatility of markets there are serious implications for economic agents to worry about. Stock market volatility is a topic that has been attracting much attention, particularly since the stock market bubble of the late 1990s and its subsequent collapse, which saw increased volatility in both individual stocks and markets. An assets variance, or volatility, is a measure of the size and speed of price changes. A widely held view, and one consistent with the Efficient Markets Hypothesis (EMH), is that stock pric