Excess Volatility in the Term Structure of Interest Rates, in Share Prices and in Eurozone Derivatives

Excess volatility in share prices and the term structure of interest rates is documented by the literature, highlighting the limitations of traditional models and the efficient market hypothesis. Amia Santini studies the potential shortcomings of methodologies used to uncover inconsistencies and the potential explanations of the observed phenomenon. She focuses on a newer field of study, derivative instruments, and presents previous results recovered with a worldwide focus. An empirical analysis is performed to assess whether a similar outcome would be obtained in the Eurozone market. The exploration of financial information that falls underneath the risk-neutral measure reduces the importance of time-varying discount rates as a potential explanation of excess volatility, opening the door to different and innovative prospects.

Format: Paperback / softback
Length: 77 pages
Publication date: 04 May 2022
Publisher: Springer-Verlag Berlin and Heidelberg GmbH & Co. KG

The phenomenon of excess volatility in the context of share prices and the term structure of interest rates has been extensively documented in the existing literature, highlighting the limitations of traditional models of rational expectations and the reliance on the efficient market hypothesis. The data consistently violates the bounds on volatility that are derived from these models. In her research, Amia Santini examines the potential shortcomings of the methodologies employed to uncover these inconsistencies and explores the potential explanations of the observed phenomenon that align with the rational expectation framework.

Santini's focus extends to a relatively newer field of study: derivative instruments. She presents previous results of excess volatility recovered with a worldwide focus and conducts an empirical analysis to assess whether a similar outcome would be obtained in the Eurozone market. By examining financial information that falls under the risk-neutral measure, such as derivative prices, Santini challenges the significance of time-varying discount rates as a potential explanation for excess volatility. She argues that the martingale measure already incorporates all potential variation in risk premia, which is the primary driver of changes in discount rates. This revelation opens up a realm of diverse and innovative possibilities, with particular attention given to a novel model of investor behavior known as natural expectations.

In conclusion, Santini's research contributes to our understanding of excess volatility by challenging traditional assumptions and exploring innovative perspectives. Her work highlights the importance of considering alternative models and measures to explain financial market behavior, ultimately advancing our knowledge of investment strategies and risk management.

Weight: 131g
Dimension: 210 x 148 (mm)
ISBN-13: 9783658374495
Edition number: 1st ed. 2022