What does financial volatility tell us about macroeconomic fluctuations?

Marcelle Chauvet, Zeynep Senyuz and Emre Yoldas

No 2013-61, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper provides an extensive analysis of the predictive ability of financial volatility measures for economic activity. We construct monthly measures of stock and bond market volatility from daily returns and model volatility as composed of a long-run component that is common across all series, and a set of idiosyncratic short-run components. Based on powerful in-sample predictive ability tests, we find that the stock volatility measures and the common factor significantly improve short-term forecasts of conventional financial indicators. A real-time out of sample assessment yields a similar conclusion under the assumption of noisy revisions in macroeconomic data. In a non-linear extension of the dynamic factor model for volatility series, we identify three regimes that describe the joint volatility dynamics: low, intermediate and high-volatility. We also find that the non-linear model performs remarkably well in tracking the Great Recession of 2007-2009 in real-time.

Date: 2013
New Economics Papers: this item is included in nep-cba, nep-for, nep-lam, nep-ltv, nep-mac and nep-neu
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: What does financial volatility tell us about macroeconomic fluctuations? (2015)
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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