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Macroeconomic volatility and stock market volatility: empirical evidence on Finnish data

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  • Eva Liljeblom
  • Marianne Stenius

Abstract

The relationship is analysed between conditional stock market volatility and macroeconomic volatility using monthly data for Finland from 1920 to 1991. Conditional monthly volatility is measured as simple weighted moving averages, and also obtained from GARCH estimations. The results are surprisingly strong as compared to those on US data. Significant results are obtained from stock market volatility as a predictor for macroeconomic volatility, as well as the converse. Tests of the joint and simultaneous explanatory power of the macroeconomic volatilities indicate that between one-sixth to above two-thirds of the changes in aggregate stock volatility might be related to macroeconomic volatility. Some evidence of a negative relationship between stock market volatility and trading volume growth was also detected. This result could either be interpreted as an effect of idiosyncratic demand shifts cancelling out as the thickness of the market is increasing, or as a sign of volume growth being some proxy for the level of economic activity.

Suggested Citation

  • Eva Liljeblom & Marianne Stenius, 1997. "Macroeconomic volatility and stock market volatility: empirical evidence on Finnish data," Applied Financial Economics, Taylor & Francis Journals, vol. 7(4), pages 419-426.
  • Handle: RePEc:taf:apfiec:v:7:y:1997:i:4:p:419-426
    DOI: 10.1080/096031097333538
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    Citations

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    Cited by:

    1. Knif, Johan & Pynnonen, Seppo & Luoma, Martti, 1996. "Testing for common autocorrelation features of two scandinavian stock markets," International Review of Financial Analysis, Elsevier, vol. 5(1), pages 55-64.
    2. Döpke, Jörg & Pierdzioch, Christian, 1998. "Brokers and business cycles: Does financial market volatility cause real fluctuations?," Kiel Working Papers 899, Kiel Institute for the World Economy (IfW).
    3. Charles K.D. Adjasi, 2009. "Macroeconomic uncertainty and conditional stock-price volatility in frontier African markets: Evidence from Ghana," Journal of Risk Finance, Emerald Group Publishing, vol. 10(4), pages 333-349, August.
    4. Morelli, David, 2002. "The relationship between conditional stock market volatility and conditional macroeconomic volatility: Empirical evidence based on UK data," International Review of Financial Analysis, Elsevier, vol. 11(1), pages 101-110.
    5. Albaity, Mohamed Shikh, 2011. "Impact of the monetary policy instruments on Islamic stock market index return," Economics Discussion Papers 2011-26, Kiel Institute for the World Economy (IfW).
    6. Eun Ahn & Jin Man Lee, 2006. "Volatility relationship between stock performance and real output," Applied Financial Economics, Taylor & Francis Journals, vol. 16(11), pages 777-784.
    7. Margaret N. Okoli, 2012. "Return-Volatility Interactions in the Nigerian Stock Market," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 2(2), pages 389-399, June.
    8. Sierimo, Carolina & Virén, Matti, 1995. "Financial factors and the macroeconomy," Research Discussion Papers 34/1995, Bank of Finland.
    9. Döpke, Jörg & Pierdzioch, Christian, 1999. "Financial market volatility and inflation uncertainty: An empirical investigation," Kiel Working Papers 913, Kiel Institute for the World Economy (IfW).

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