If it could be proved that there are no sound economic reasons for price changes in the stock market then these two forms of analysis could be rendered worthless. Initially, the author will discuss the readings that have been found relevant to the topic of the essay. Then the author will explore his own thoughts on the subject with the help of an analysis of the greatest period of market volatility in recent times - 'Meltdown Monday' or the stock market crash of 1987. Amongst the literature of most relevance to the whole volatility issue is Robert Shiller's 'Market Volatility'. Shiller is a firm advocate of the popular model explanation of stock market volatility.
Popular models are a qualitative explanation of price fluctuations.
In short, it proposes that investor reactions, due to psychological or sociological beliefs, exert a greater influence on the market than good economic sense arguments. Excess volatility is the name given to that level of volatility over and above that which is predicted by efficient market theorists. In Shiller's eyes this excess volatility can be attributed to investors' psychological behaviour. He claims that substantial price changes can be explained by a collective change of mind by the investing public which can only be explained by its thoughts and beliefs on future events, i.e. its psychology. The popular models theory, according to Shiller, proposes that people act inappropriately to information that they receive.