Stock market volatility and macroeconomic fundamentals

Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. DOI: We revisit the relation between stock market volatility and macroeconomic activity using a new class of component models that distinguish short-run from long-run movements. We formulate models with the long-term component driven by inflation and industrial production growth that are in terms of pseudo out-of-sample prediction for horizons of one quarter at par or outperform more traditional time series volatility models at longer horizons.

Stock Market Volatility and Macroeconomic Fundamentals

In this paper, we investigate the dynamic relationship between financial market volatility, macroeconomic fundamentals and investor sentiment, employing a two-factor model to decompose volatility into a persistent long-run component and a transitory short-run component.

Using a structural VAR model with Bayesian sign restrictions, we show that adverse shocks to aggregate demand and supply cause an increase in the persistent component of both stock and bond market volatility, and that adverse shocks to the persistent component of either stock or bond market volatility cause a deterioration in macroeconomic fundamentals.

We find no evidence of a relationship between the transitory component of volatility and macroeconomic fundamentals. Instead, we find that the transitory component is more closely associated with changes in investor sentiment. Our results are robust to a wide range of alternative specifications. View more. We use necessary cookies to make our site work for example, to manage your session. Necessary cookies enable core functionality on our website such as security, network management, and accessibility.

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Skip to main content. Financial market volatility, macroeconomic fundamentals and investor sentiment Working papers set out research in progress by our staff, with the aim of encouraging comments and debate. Published on 16 August Download PDF. Convert this page to PDF. Other papers. Back to top.

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Downloadable (with restrictions)! We revisit the relation between stock market volatility and macroeconomic activity using a new class of component models that. We revisit the relation between stock market volatility and macroeconomic activity using a new class of component models that distinguish short-run from.

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Ahmed, S.

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Financial market volatility, macroeconomic fundamentals and investor sentiment

In this paper, we investigate the dynamic relationship between financial market volatility, macroeconomic fundamentals and investor sentiment, employing a two-factor model to decompose volatility into a persistent long-run component and a transitory short-run component. Using a structural VAR model with Bayesian sign restrictions, we show that adverse shocks to aggregate demand and supply cause an increase in the persistent component of both stock and bond market volatility, and that adverse shocks to the persistent component of either stock or bond market volatility cause a deterioration in macroeconomic fundamentals. We find no evidence of a relationship between the transitory component of volatility and macroeconomic fundamentals. Instead, we find that the transitory component is more closely associated with changes in investor sentiment. Our results are robust to a wide range of alternative specifications. View more.