Business Cycles, Financial Crises, and Stock Volatility
45 Pages Posted: 27 Apr 2000 Last revised: 9 Aug 2010
Date Written: May 1989
This paper shows that stock volatility increases during recessions and financial crises from 1834-1987. The evidence reinforces the notion that stock prices are an important business cycle indicator. Using two different statistical models for stock volatility, I show that volatility increases after major financial crises. Moreover. stock volatility decreases and stock prices rise before the Fed increases margin requirements. Thus, there is little reason to believe that public policies can control stock volatility. The evidence supports the observation by Black  that stock volatility increases after stock prices fall.
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