Stock market volatility and business cycle: Evidence from linear and nonlinear causality tests

Abstract

This paper investigates the relationship between stock market volatility and the business cycle in four major economies, namely the US, Canada, Japan and the UK. We employ both linear and nonlinear bivariate causality tests and we further conduct a multivariate analysis to explore possible spillover effects across countries. Our results suggest that there is a bidirectional causal relationship between stock market volatility and the business cycle within each country and additionally reveal that the recent financial crisis plays an important role in this context. Finally, we identify a significant impact of the US on the remaining markets.JEL Classification: G01, G10, E32

Risk, Business Cycles and Financial Crises: Evidence from Islamic and Conventional Stocks

“…Mele (2008) observes a high degree of stock volatility during recession than during expansion in the US, suggesting that stock prices react to changes in economic conditions. Consistent with previous studies, Choudhry et al (2016) find significant link between business cycle and stock market volatility in Canada and in the United Kingdom (UK).…”

“…The results are similar to the findings presented in Table 3. Confirming the evidence in Choudhry et al (2016), Ho et al (2014), Rejeb and Salha (2013) and Schwert (1989Schwert ( , 2011, we find that financial crises have dramatic effect on the risk of stock. The findings signify that risk for all, Islamic and conventional stocks are significantly higher during the periods of financial crises than the periods of non-financial crises.…”

“…Past studies find that business cycles have impact on stock risk (Choudhry, Papadimitriou & Shabi 2016;Mele 2008;Schwert 1989). The authors provide evidence that stock volatility is higher during recessions.…”

Conference Overview and Summary of Papers: International Conference on Financial Cycles, Systemic Risk, Interconnectedness, and Policy Options for Resilience

“…Finally, in light of increased interest in the influence of stock market volatility on macroeconomic performance (Chauvet et al 2015, Choudhry et al 2016, the identification of the presence and significance of net volatility spillovers between the US and BRICS stock markets suggests avenues for future research from macroeconomic forecasters and policymakers; especially, based on the analysis presented in this paper, those located in the economies of the Russian Federation, India, the People's Republic of China, and South Africa. Extensions include, for example, analysis of the impact of volatility in their home and the US stock markets on real economic activity, and the use of switches between low-and high-volatility regimes as potential early warning signs of economic slowdown or recession.…”

“…In addition, information about spillover effects between emerging markets and developed markets may be useful in a number of applications. This includes those that assess effective portfolio hedge ratios, value-at-risk and optimal portfolio weights (Arouri et al 2012, Syriopoulos et al 2015, Mensi et al 2016, and those that attempt to provide forecasts of the business cycle and early warnings of economic downturns (Chauvet et al 2015, Choudhry et al 2016. Table 1 reports the total spillover index matrices of conditional volatilities.…”