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Do Periods of Extreme Asset Price Volatility Signal the Beginning of a Recession? An International Comparison

Author

Listed:
  • Delfina Ricordi
  • Martín Sola
  • Fabio Spagnolo
  • Nicola Spagnolo

Abstract

This paper investigates the relationship between financial markets and real economic activity. Based on a bivariate Markov switching model, we propose a procedure for analysing links between stock market volatility and output growth. The method provides a convenient way of interpreting the predictive content of different series’ first and second moments. We examine and discuss an empirical application of this procedure for a subset of developed countries (U.S., U.K., Japan, Germany, Italy and France). In the empirical analysis, we test whether changes in stock market volatility precede the change in the state of output growth.

Suggested Citation

  • Delfina Ricordi & Martín Sola & Fabio Spagnolo & Nicola Spagnolo, 2025. "Do Periods of Extreme Asset Price Volatility Signal the Beginning of a Recession? An International Comparison," Department of Economics Working Papers 2025_03, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2025_03
    as

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    References listed on IDEAS

    as
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    3. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    4. Annaert, Jan & De Ceuster, Marc J.K. & Valckx, Nico, 2001. "Financial market volatility: Informative in predicting recessions," Bank of Finland Research Discussion Papers 14/2001, Bank of Finland.
    5. Phillips, Kerk L., 1991. "A two-country model of stochastic output with changes in regime," Journal of International Economics, Elsevier, vol. 31(1-2), pages 121-142, August.
    6. Demian Pouzo & Zacharias Psaradakis & Martin Sola, 2022. "Maximum Likelihood Estimation in Markov Regime‐Switching Models With Covariate‐Dependent Transition Probabilities," Econometrica, Econometric Society, vol. 90(4), pages 1681-1710, July.
    7. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
    8. Psaradakis, Zacharias & Sola, Martin, 1998. "Finite-sample properties of the maximum likelihood estimator in autoregressive models with Markov switching," Journal of Econometrics, Elsevier, vol. 86(2), pages 369-386, June.
    9. Vu, Nam T., 2015. "Stock market volatility and international business cycle dynamics: Evidence from OECD economies," Journal of International Money and Finance, Elsevier, vol. 50(C), pages 1-15.
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    11. repec:zbw:bofrdp:2001_014 is not listed on IDEAS
    12. Berg, Kimberly A. & Vu, Nam T., 2019. "International spillovers of U.S. financial volatility," Journal of International Money and Finance, Elsevier, vol. 97(C), pages 19-34.
    13. Annaert, Jan & De Ceuster, Marc J.K. & Valckx, Nico, 2001. "Financial market volatility : Informative in predicting recessions," Research Discussion Papers 14/2001, Bank of Finland.
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    More about this item

    Keywords

    Volatility of Stock Prices; Booms and Recessions; Markov Switching.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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