Working Paper: NBER ID: w16976
Authors: G. William Schwert
Abstract: This paper uses monthly returns from 1802-2010, daily returns from 1885-2010, and intraday returns from 1982-2010 in the United States to show how stock volatility has changed over time. It also uses various measures of volatility implied by option prices to infer what the market was expecting to happen in the months following the financial crisis in late 2008. This episode was associated with historically high levels of stock market volatility, particularly among financial sector stocks, but the market did not expect volatility to remain high for long and it did not. This is in sharp contrast to the prolonged periods of high volatility during the Great Depression. Similar analysis of stock volatility in the United Kingdom and Japan reinforces the notion that the volatility seen in the 2008 crisis was relatively short-lived. While there is a link between stock volatility and real economic activity, such as unemployment rates, it can be misleading.
Keywords: stock volatility; financial crisis; economic activity; VIX
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock volatility surged during the 2008 financial crisis (G17) | stock volatility returned to normal levels relatively quickly (G17) |
| high volatility (C58) | market did not expect high volatility to last (G17) |
| stock volatility (G17) | real economic activity (E39) |
| stock volatility (G17) | unemployment rates (J64) |
| public perception of the crisis influenced by visible stock volatility (E32) | may not accurately reflect underlying economic realities (E39) |