What drives U.S. financial sector volatility? A Bayesian model averaging perspective

Peter Gernát, Zuzana Košťálová and Štefan Lyócsa

Research in International Business and Finance, 2020, vol. 51, issue C

Abstract: We investigate the driving forces behind the quarterly stock price volatility of firms in the U.S. financial sector over the period from 1990 to 2017. The driving forces represent a set of 28 economic indicators that are routinely used to detect financial instability and crises and correspond to the development of the financial, monetary, real, trade and fiscal sector as well as to the development of the bond and equity markets. The dimensionality and model choice uncertainty are addressed using Bayesian model averaging, which led to the identification of only seven variables that tend to systematically drive the stock price volatility of financial firms in the U.S.: housing prices, short-term interest rates, net national savings, default yield spread, and three credit market variables. We also confirm that our results are not an artefact of volatility associated with market downturns (for negative semi-volatility), as the results are similar even when market volatility is associated with market upsurge (positive semi-volatility). Given the identified drivers, our results provide supporting empirical evidence that dampening credit cycles might lead to decreased volatility in the financial sector.

Keywords: Realized volatility; Realized semi-volatility; Bayesian model averaging; Financial instability; Early warning indicators (search for similar items in EconPapers)
JEL-codes: E44 G01 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:51:y:2020:i:c:s0275531919302697

DOI: 10.1016/j.ribaf.2019.101095

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