Financial Volatility and Economic Activity

Fabio Fornari and Antonio Mele

Journal of Financial Management, Markets and Institutions, 2013, issue 2, 155-198

Abstract: Does uncertainty in capital markets affect the business cycle? We find that financial volatility predicts 30% of post-war economic activity in the United States, and that during the Great Moderation, aggregate stock market volatility explains, alone, up to 55% of real growth. In out-of-sample tests, stock price volatility helps predict turning points over and above traditional financial variables such as creditor term spreads, and other leading indicators. Combining stock volatility and the term spread leads to a proxy for (i) aggregate risk, (ii) risk-premiums and (iii) a gauge of monetary policy conduct, which tracks and anticipates the business cycle. At the heart of our analysis is a notion of volatility based on a slowly changing measure of return variability. This volatility is designed to capture long-run uncertainty in capital markets, and is particularly successful at explaining trends in the economic activity at horizons of six months and one year.

Keywords: Capital Markets Uncertainty; Asset Prices and the Business Cycle; Macroeconomic Risk; Volatility Spillovers; the Great Moderation (search for similar items in EconPapers)
Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
https://www.rivisteweb.it/download/article/10.12831/75569 (application/pdf)
https://www.rivisteweb.it/doi/10.12831/75569 (text/html)

Related works:
Working Paper: Financial volatility and economic activity (2009)
Working Paper: Financial Volatility and Economic Activity (2009)
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:mul:jdp901:doi:10.12831/75569:y:2013:i:2:p:155-198

Access Statistics for this article

More articles in Journal of Financial Management, Markets and Institutions from Società editrice il Mulino
Bibliographic data for series maintained by ().