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Stock market volatility and the business cycle
Author(s) -
Hamilton James D.,
Lin Gang
Publication year - 1996
Publication title -
journal of applied econometrics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.878
H-Index - 99
eISSN - 1099-1255
pISSN - 0883-7252
DOI - 10.1002/(sici)1099-1255(199609)11:5<573::aid-jae413>3.0.co;2-t
Subject(s) - bivariate analysis , volatility (finance) , economics , recession , business cycle , stock (firearms) , econometrics , industrial production , stock market , financial economics , macroeconomics , statistics , mathematics , mechanical engineering , paleontology , horse , biology , engineering
This paper investigates the joint time series behavior of monthly stock returns and growth in industrial production. We find that stock returns are well characterized by year‐long episodes of high volatility, separated by longer quiet periods. Real output growth, on the other hand, is subject to abrupt changes in the mean associated with economic recessions. We study a bivariate model in which these two changes are driven by related unobserved variables, and conclude that economic recessions are the primary factor that drives fluctuations in the volatility of stock returns. This framework proves useful both for forecasting stock volatility and for identifying and forecasting economic turning points.