It is generally believed that excessive stock market volatility reflects non-mathematical market expectations that are driven by “irrational exuberance” or “animal spirits”. As shown in this paper, there is an alternative explanation. If ex-ante and ex-post expectations are calculated in...

Stochastic Volatility (SV) models are widely used in financial applications. To decide whether standard parametric restrictions are justified for a given dataset, a statistical test is required. In this paper, we develop such a test based on the linear state space representation. We provide a...