Business Cycles, Financial Crises, and Stock Volatility

G. William Schwert

NBER Working Paper No. 2957 (Also Reprint No. r1369)
Issued in March 1990
NBER Program(s):   ME

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.

(402 K)

Published: Carnegie-Rochester Conference Series on Public Policy, Vol. 31, pp. 83-125, (1989).

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