BEHAVIORAL FINANCE
Individual Coursework
The "volatility puzzle" has its origins in the early work of Shiller (1981) and LeRoy and Porter (1981), which found evidence of excessive volatility of stock prices relative to the underlying dividend/earnings process.
Despite subsequent relaxation of assumptions, Shiller's conclusion could not be overturned for reasonable values of the coefficient of relative risk aversion.
With reference to relevant literature and empirical studies, critically evaluate why this is a puzzle.
Does behavioral theory offer a better explanation to this phenomenon?
Word limits: 2,500