Macroeconomic Volatility and Stock Market Volatility, Worldwide
Notwithstanding its impressive contributions to empirical financial economics, there remains a significant gap in the volatility literature, namely its relative neglect of the connection between macroeconomic fundamentals and asset return volatility. We progress by analyzing a broad international cross section of stock markets covering approximately forty countries. We find a clear link between macroeconomic fundamentals and stock market volatilities, with volatile fundamentals translating into volatile stock markets.
We gratefully dedicate this paper to Rob Engle on the occasion of his 65th birthday. The research was supported by the Guggenheim Foundation, the Humboldt Foundation, and the National Science Foundation. For outstanding research assistance we thank Chiara Scotti and Georg Strasser. For helpful comments we thank the Editor and Referee, as well as Joe Davis, Aureo DePaula, Jonathan Wright, and participants at the Penn Econometrics Lunch, the Econometric Society 2008 Winter Meetings in New Orleans, and the Engle Festschrift Conference. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.