The propose of this paper is to analyze stock market volatilities based on a variance bound test with cash flows related to firm’s real value. In prior studies, only cash dividends are used to determine stock prices and we find apparent evidence of excess volatility in the stock market. However, cash dividends can be controlled and manipulated by managers so that they might not reflect the true value of companies.
The study examines stock prices, cash dividends and other cash flows related to firm’s value in KOSPI over the period 1985-2002. We conduct a variance bound test based on monthly serried of cash distributions and find that stock prices are not too volatile. These results indicate that in order to correctly analyze volatility of stock market, actual stock prices are determined by discounted value of all future cash flows. And Korean stock market has been efficient.
