An empirical test of an ex-ante model of the determination of stock return volatility

The assumption that changing expected cash flows and discount factors affect a security's return is at the foundation of many financial models. This study examines empirically the hypothesis that expected stock return variability is a function of cash flow and discount rate uncertainty. Maximum likelihood estimation techniques and expectational data are employed. Strong, positive relationships are found, verifying the foundations of the ex‐ante models with ex‐ante data and providing a better understanding of security markets by explaining, in part, the causes of expected stock price variability.