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Credit Standards: A New Predictor of U.S. Stock Market Realized Volatility

Author

Listed:
  • Matteo Bonato

    (Department of Economics and Econometrics, University of Johannesburg, Auckland Park, South Africa; IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France)

  • Oguzhan Cepni

    (Ostim Technical University, Ankara, Turkiye; University of Edinburgh Business School, Centre for Business, Climate Change, and Sustainability; Department of Economics, Copenhagen Business School, Denmark)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Private Bag X20, Hatfield 0028, South Africa)

  • Christian Pierdzioch

    (Department of Economics, Helmut Schmidt University, Holstenhofweg 85, P.O.B. 700822, 22008 Hamburg, Germany)

Abstract

We introduce credit standards from the Federal Reserve's Senior Loan Officer Opinion Survey (SLOOS) as a novel predictor of U.S. stock market realized volatility over 1990:04-2024:12. We show that tighter credit standards significantly predict higher realized volatility both in- and out-of-sample at one-, three-, and six-month-ahead horizons. A parsimonious model with only the credit standards factor outperforms more complex specifications incorporating macroeconomic factors, uncertainty indexes, and realized moments, estimated via elastic-net and random forest methods, with forecasting gains increasing at longer horizons. These findings establish credit standards as a powerful and distinct predictor of stock market volatility with practical implications for portfolio allocation and risk management.

Suggested Citation

  • Matteo Bonato & Oguzhan Cepni & Rangan Gupta & Christian Pierdzioch, 2026. "Credit Standards: A New Predictor of U.S. Stock Market Realized Volatility," Working Papers 202607, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:202607
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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