Working Paper: CEPR ID: DP1923
Authors: John Y. Campbell; Sangjoon Kim; Martin Lettau
Abstract: This paper studies three different measures of monthly stock market volatility: the time-series volatility of daily market returns within the month; the cross-sectional volatility or ?dispersion? of daily returns on industry portfolios, relative to the market, within the month; and the dispersion of daily returns on individual firms, relative to their industries, within the month. Over the period 1962?95 there has been a noticeable increase in firm-level volatility relative to market volatility. All the volatility measures move together in a countercyclical fashion. While market volatility tends to lead the other volatility series, industry-level volatility is a particularly important leading indicator for the business cycle.
Keywords: volatility; dispersion; business cycles
JEL Codes: E32; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market volatility (Mkt) (G17) | Total stock market volatility (G17) |
| Industry volatility (Ind) increases during economic downturns (L16) | GDP growth (O49) |
| Market volatility (Mkt) (G17) | Industry volatility (Ind) (L16) |
| Market volatility (Mkt) (G17) | Firm volatility (Firm) (D21) |
| Firm volatility (Firm) (D21) | Market volatility (Mkt) (G17) |
| Industry volatility (Ind) (L16) | GDP growth (O49) |