Working Paper: NBER ID: w2957
Authors: G. William Schwert
Abstract: This paper shows that stock volatility increases during recessions and financial crises from 1834-1987. The evidence reinforces the notion that stock prices are an important business cycle indicator. Using two different statistical models for stock volatility, I show that volatility increases after major financial crises. Moreover. stock volatility decreases and stock prices rise before the Fed increases margin requirements. Thus, there is little reason to believe that public policies can control stock volatility. The evidence supports the observation by Black [1976] that stock volatility increases after stock prices fall.
Keywords: stock volatility; financial crises; business cycles
JEL Codes: E32; G01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock prices decline (G10) | stock volatility increase (G17) |
| recessions and financial crises (G01) | stock volatility increase (G17) |
| Federal Reserve increases margin requirements (E52) | stock volatility decrease (G17) |
| Federal Reserve increases margin requirements (E52) | stock prices rise (G12) |