What Does Realized Volatility Tell Us About Macroeconomic Fluctuations?

• Activity Number: 516
• Type: Contributed
• Date/Time: Wednesday, August 4, 2010 : 10:30 AM to 12:20 PM
• Sponsor: Business and Economic Statistics Section
• Author(s): Zeynep Senyuz*+ and Marcelle Chauvet and Emre Yoldas
• Companies: University of New Hampshire and University of California, Riverside and Bentley University
• Keywords: Forecasting ; Business Cycles ; Realized Volatility ; Markov Switching ; Dynamic Factor Models

Abstract

We investigate the predictive power of various realized volatility measures for future economic growth. We construct monthly stock market, industry level and bond market realized volatility measures from daily returns. We find that these volatility measures are countercyclical and contain valuable information about the future path of economic activity. We extract a volatility factor through the modeling of common dynamics of the realized volatility measures and show that this measure provides superior performance in predicting future growth, density of industrial production growth and also anticipating beginnings of recessions. We also model the asymmetric behavior of the realized volatility and the macro factor via Markov-switching dynamic factor models. We find that the realized volatility factor is useful in anticipating NBER recessions with an average lead of one month.