Are U.K. Stock Prices Excessively Volatile? Trading Rules and Variance Bounds Tests.

The authors apply the original variance bounds tests to the present value model for the U.K. stock market and amend these tests to take account of revisions in the model's parameters. They show that variance bounds tests that correct for this are no longer violated. However, they claim there is excess volatility if agents, restricted to using only current information to compute a trading rule, could make excess profits. They show that a trading rule exists which yields, in the long run, more than twice the wealth from buying than holding a representative market portfolio. Copyright 1989 by Royal Economic Society.