Business Cycles, Financial Crises and Stock Volatility


G. William Schwert

University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research


Carnegie-Rochester Conference Series on Public Policy, 31 (Autumn 1989) 83-125


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.

Key words: Stock Market, Recession, Volatility, Leverage, ARIMA

JEL Classifications: G12, G14, E32


Cited 99 times in the SSCI and SCOPUS through 2014
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© Copyright 1989, Elsevier
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