Gone with the Vol: A Decline in Asset Return Predictability During the Great Moderation

Alex Hsu (), Francisco Palomino and Liang Qian ()
Additional contact information
Alex Hsu: Georgia Institute of Technology, Atlanta, Georgia 30332
Liang Qian: Citigroup, New York, New York 10013

Management Science, 2023, vol. 69, issue 5, 3025-3047

Abstract: We document and examine a significant shift in the comovement of asset returns and macroeconomic volatility during the Great Moderation. Strong U.S. stock and bond return predictability from several macroeconomic volatility series before 1982 was followed by a significant predictability decline during the Great Moderation (1982–2008). These findings are robust to alternative empirical specifications and out-of-sample tests. In a calibrated equilibrium model with time-varying volatility, the predictability decline requires changes in several model elements. Lower return predictability is consistent with stronger policy responses to inflation and output, a larger slope in the New Keynesian Phillips curve, and reduced sensitivity of both macroeconomic and financial variables to a volatility factor. Our results contribute to the examination of macroeconomic volatility as a driver of expected asset returns and the instability in predictive regressions. We further identify sources of the Great Moderation using asset price dynamics.

Keywords: asset return predictability; time-varying macroeconomic volatility; monetary policy; the Great Moderation (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2022.4429 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:5:p:3025-3047

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().