Fundamental uncertainty and stock market volatility

Authors: Arnold, Ivo; Vrugt, Evert

Source: Applied Financial Economics, Volume 18, Number 17, September 2008 , pp. 1425-1440(16)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

We provide empirical evidence on the link between stock market volatility and macroeconomic uncertainty. We show that US stock market volatility is significantly related to the dispersion in economic forecasts from participants in the Survey of Professional Forecasters over the period 1969 to 1996. This link is much stronger than that between stock market volatility and the more traditional time-series measures of macroeconomic volatility, but disappears from 1997 onwards. This coincides with a previously documented regime shift in stock volatility. Macroeconomic uncertainty is also able to explain and forecast the volatilities of the Fama and French factors SMB, HML and UMD.

Document Type: Research article

DOI: http://dx.doi.org/10.1080/09603100701857922

Affiliations: 1: Erasmus School of Economics, Erasmus Universiteit Rotterdam, PO Box 1738, 3000 DR, Rotterdam, The Netherlands and Nyenrode Business Universiteit, Breukelen, The Netherlands

Publication date: 2008-09-01

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