What Does Financial Volatility Tell Us About Macroeconomic Fluctuations?

46 Pages Posted: 23 Nov 2011 Last revised: 30 Apr 2015

See all articles by Marcelle Chauvet

Marcelle Chauvet

University of California Riverside

Zeynep Senyuz

Board of Governors of the Federal Reserve System

Emre Yoldas

Federal Reserve Board

Multiple version iconThere are 3 versions of this paper

Date Written: December 30, 2014

Abstract

We provide an extensive analysis of the predictive ability of financial volatility for economic activity. We consider monthly measures of realized and implied volatility from the stock and bond markets. In a dynamic factor framework, we extract the common long-run component of volatility that is likely to be linked to economic fundamentals. Based on powerful in-sample predictive ability tests, we find that the stock volatility measures and the common factor significantly improve macroeconomic forecasts of conventional financial indicators, especially over short horizons. A real-time out of sample assessment yields similar conclusions under the assumption of noisy revisions in macroeconomic data. In a nonlinear extension of the dynamic factor model, we identify two distinct volatility regimes, and show that the high-volatility regime provides early signals of the Great Recession, which was associated with severe financial distress and credit disintermediation.

Keywords: Financial Volatility, Real-time Data, Predictive Ability Tests, Dynamic Factor Model, Markov Switching

JEL Classification: C32, E32, E44

Suggested Citation

Chauvet, Marcelle and Senyuz, Zeynep and Yoldas, Emre, What Does Financial Volatility Tell Us About Macroeconomic Fluctuations? (December 30, 2014). Available at SSRN: https://ssrn.com/abstract=1963213 or http://dx.doi.org/10.2139/ssrn.1963213

Marcelle Chauvet

University of California Riverside ( email )

900 University Avenue
4136 Sproul Hall
Riverside, CA 92521
United States
(951) 827-1587 (Phone)

HOME PAGE: http://https://sites.google.com/site/marcellechauvet/

Zeynep Senyuz

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Emre Yoldas (Contact Author)

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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