What Does Financial Volatility Tell Us About Macroeconomic Fluctuations?

46 Pages Posted: 6 Nov 2013

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: August 19, 2013

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.

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? (August 19, 2013). FEDS Working Paper No. 2013-61. Available at SSRN: https://ssrn.com/abstract=2350357 or http://dx.doi.org/10.2139/ssrn.2350357

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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