A Monthly Volatility Index for the US Economy

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A Monthly Volatility Index for the US Economy

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Cecilia Frale
David Veredas

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David Veredas

Abstract

We estimate the monthly volatility of the US economy from 1968 to 2006 by extending the coincident index model of Stock and Watson (1991). Our volatility index, which we call VOLINX, has four applications. First, it sheds light on the Great Moderation. VOLINX captures the decrease in the volatility in the mid-80s as well as the different episodes of stress over the sample period. In the 70s and early 80s the stagflation and the two oil crises marked the pace of the volatility whereas 09/11 is the most relevant shock after the moderation. Second, it helps to understand the economic indicators that cause volatility. While the main determinant of the coincident index is industrial production, VOLINX is mainly affected by employment and income. Third, it adapts the confidence bands of the forecasts. In and out-of-sample evaluations show that the confidence bands may differ up to 50% with respect to a model with constant variance. Last, the methodology we use permits us to estimate monthly GDP, which has conditional volatility that is partly explained by VOLINX. These applications can be used by policy makers for monitoring and surveillance of the stress of the economy.

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Paper provided by Université Libre de Bruxelles, Ecares in its series ECARES Working Papers with number 2008_008.

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Length: 30 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:eca:wpaper:2008_008

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Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-10-21 (All new papers)
NEP-ECM-2008-10-21 (Econometrics)
NEP-MAC-2008-10-21 (Macroeconomics)

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