Economic Volatility and Financial Markets: The Case of Mortgage-Backed Securities
29 Pages Posted: 28 Sep 2012
Date Written: September 27, 2012
The volatility of aggregate economic activity in the United States decreased markedly in the mid eighties. The decrease was diffused among several components of GDP and has been linked to a more stable economic environment, identified by smaller shocks and more effective policy, and a diverse set of innovations related to technology and inventory management as well as financial markets. We document a negative relation between the volatility of GDP and some of its components and one such financial development: the emergence of mortgage-backed securities. We also document that the relationship between the volatility of aggregate economy activity and the development of mortgage-backed-securities markets changes sign, from negative to positive, in the early 2000's.
Keywords: Great Moderation, Volatility, Mortgage Backed Securities, Regime Switching
JEL Classification: E30, G10
Suggested Citation: Suggested Citation