What does financial volatility tell us about macroeconomic fluctuations?

Marcelle Chauvet, Zeynep Senyuz and Emre Yoldas

Journal of Economic Dynamics and Control, 2015, vol. 52, issue C, 340-360

Abstract: We provide an extensive analysis of the predictive ability of financial volatility for economic activity. We consider monthly measures of realized and implied volatility from the stock and bond markets. In a dynamic factor framework, we extract the common long-run component of volatility that is likely to be linked to economic fundamentals. Based on powerful in-sample predictive ability tests, we find that the stock volatility measures and the common factor significantly improve macroeconomic forecasts of conventional financial indicators, especially over short horizons. A real-time out of sample assessment yields similar conclusions under the assumption of noisy revisions in macroeconomic data. In a nonlinear extension of the dynamic factor model, we identify two distinct volatility regimes, and show that the high-volatility regime provides early signals of the Great Recession, which was associated with severe financial distress and credit disintermediation.

Keywords: Financial volatility; Real-time data; Predictive ability tests; Dynamic factor model; Markov switching (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (32)

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Related works:
Working Paper: What does financial volatility tell us about macroeconomic fluctuations? (2013)
Working Paper: What does financial volatility tell us about macroeconomic fluctuations? (2012)
Working Paper: What does financial volatility tell us about macroeconomic fluctuations? (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:52:y:2015:i:c:p:340-360

DOI: 10.1016/j.jedc.2015.01.002

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