What does financial volatility tell us about macroeconomic fluctuations?

Marcelle Chauvet, Zeynep Senyuz and Emre Yoldas

MPRA Paper from University Library of Munich, Germany

Abstract: This paper provides an extensive analysis of the predictive ability of financial volatility measures for economic activity. We construct monthly measures of aggregated and industry-level stock volatility, and bond market volatility from daily returns. We model log financial volatility as composed of a long-run component that is common across all series, and a short-run component. If volatility has components, volatility proxies are characterized by large measurement error, which veils analysis of their fundamental information and relationship with the economy. We find that there are substantial gains from using the long term component of the volatility measures for linearly projecting future economic activity, as well as for forecasting business cycle turning points. When we allow for asymmetry in the long-run volatility component, we find that it provides early signals of upcoming recessions. In a real-time out-of-sample analysis of the last recession, we find that these signals are concomitant with the first signs of distress in the financial markets due to problems in the housing sector around mid-2007 and the implied chronology is consistent with the crisis timeline.

Keywords: Realized Volatility; Business Cycles; Forecasting; Dynamic Factor Models; Markov Switching (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 (search for similar items in EconPapers)
Date: 2010-10, Revised 2011-06
New Economics Papers: this item is included in nep-bec, nep-cis and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: What does financial volatility tell us about macroeconomic fluctuations? (2015)
Working Paper: What does financial volatility tell us about macroeconomic fluctuations? (2013)
Working Paper: What does financial volatility tell us about macroeconomic fluctuations? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:34104

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