Can Stock Volatility Be Benign? New Measurements and Macroeconomic Implications

Journal of Money, Credit and Banking, Vol. 52, 2020

38 Pages Posted: 13 Dec 2017 Last revised: 15 Mar 2021

See all articles by Yu-Fan Huang

Yu-Fan Huang

Capital University of Economics and Business, ISEM

Sui Luo

Capital University of Economics and Business

Date Written: January 20, 2019

Abstract

The Great Recession has motivated economists to investigate financial uncertainty shocks as potentially important drivers of economic fluctuations. However, not all of the factors affecting financial uncertainty could cause economic downturns. In this paper, we find non-synchronized movements of two new measures of financial market uncertainty — good and bad volatility — which are based on the maximum and minimum stock prices within a month. Good (bad) volatility is associated with better (worse) expectations about the future economic situation and clearly signals acceleration (deceleration) in economic activity. We further investigate the importance of financial uncertainty implied by the new measures. The VAR results indicate that (1) output, employment, and stock price plummet rapidly in response to a bad volatility shock, while their responses to a good volatility shock are modest, and (2) bad volatility shocks explain the bulk of economic activity and stock price fluctuations in the medium run. These results suggest that bad volatility shocks
are harmful to the economy and drive business cycle fluctuations. Distinguishing between these two types of financial uncertainty is crucial in understanding the roles that financial uncertainty plays in economic fluctuations.

Keywords: Stock Price Volatility, Uncertainty, Business Cycle, Economic Activity

JEL Classification: C32, E32, E44

Suggested Citation

Huang, Yu-Fan and Luo, Sui, Can Stock Volatility Be Benign? New Measurements and Macroeconomic Implications (January 20, 2019). Journal of Money, Credit and Banking, Vol. 52, 2020, Available at SSRN: https://ssrn.com/abstract=3085470 or http://dx.doi.org/10.2139/ssrn.3085470

Yu-Fan Huang (Contact Author)

Capital University of Economics and Business, ISEM ( email )

Beijing, 100070
China

HOME PAGE: http://sites.google.com/site/yufaneconnerd/home

Sui Luo

Capital University of Economics and Business ( email )

Beijing
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
70
Abstract Views
513
rank
398,143
PlumX Metrics