Bubbles, Fads and Stock Price Volatility Tests: A Partial Evaluation

This is a summary and interpretation of some of the literature on stock price volatility that was stimulated by Leroy and Porter 28 and Shiller 40. It appears that neither small-sample bias, rational bubbles nor some standard models for expected returns adequately explain stock price volatility. This suggests a role for some nonstandard models for expected returns. One possibility is a “fads” model in which noise trading by naive investors is important. At present, however, there is little direct evidence that such fads play a significant role in stock price determination.