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Breaks and persistency: macroeconomic causes of stock market volatility

  • Beltratti, A.
  • Morana, C.

In the paper we study the relationship between macroeconomic and stock market volatility, using S&P500 data for the period 1970- 2001. We find evidence of both long memory and structural change in volatility and a twofold linkage between stock market and macroeconomic volatility. In terms of the break processes, our results show that there are frequent cases where the break in the volatility of stock returns is associated within few months with breaks in the volatility of the Federal funds rate and M1 growth. After accounting for the structural breaks, there remain interesting relations among the breakfree series. Fractional cointegration analysis points to the existence of three long-run relationships linking stock market, money growth, inflation, the Federal funds rate, and output growth volatility, and two common long memory factors mainly associated with output and inflation volatility. We find that stock market volatility dynamics, both persistent and non persistent, are associated in a causal way with macroeoconomic volatility shocks, particularly to output growth volatility. The stock market idiosyncratic shock, which accounts for the bulk of the overall dynamics, also affects macroeconomic volatility. Yet the evidence suggests that the causality direction is stronger from macroeconomic to stock market volatility than the other way around.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 131 (2006)
Issue (Month): 1-2 ()
Pages: 151-177

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Handle: RePEc:eee:econom:v:131:y:2006:i:1-2:p:151-177
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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