 The effects of economic uncertainty on financial volatility: A comprehensive investigationChen Tong, Zhuo Huang, Tianyi Wang () and Cong Zhang Journal of Empirical Finance, 2023, vol. 73, issue C, 369-389 Abstract: We provide new empirical evidence of how financial volatility responds to an increase in economic uncertainty. Consistent with the implications derived from a theoretical equilibrium model in which investors are uncertain about the true state of the economy, our estimates for the contemporaneous effects of uncertainty on volatility are significantly positive, and their magnitudes critically depend on the economic situation and degree of investors’ risk aversion. Specifically, stock return volatility tends to overreact to increased uncertainty during good times when investors are more risk-averse. All these relations remain robust to different uncertainty measures. We further build a simple reduced-form predictive model augmented with uncertainty measure, and find the uncertainty displays additional predictive power for future volatility. Moreover, this improvement is concentrated around bad times with high risk aversion, most of which are located in the NBER-dated recession periods. Keywords: Economic uncertainty; Financial volatility; Risk aversion; Volatility forecasting (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:73:y:2023:i:c:p:369-389 DOI: 10.1016/j.jempfin.2023.08.004 Access Statistics for this article Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff More articles in Journal of Empirical Finance from Elsevier |
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