Financial market Volatility, macroeconomic fundamentals and investor Sentiment

Chiu, Ching-wai (Jeremy) and Harris, Richard D.F. and Stoja, Evarist and Chin, Michael,(2018), Financial market Volatility, macroeconomic fundamentals and investor Sentiment. , Journal of Banking and Finance, UNSPECIFIED

[thumbnail of Financial-market-Volatility--macroeconomic-fundament_2018_Journal-of-Banking.pdf] Text
Restricted to Repository staff only

Download (4MB) | Request a copy


In this paper, we investigate the dynamic relationship between financial market volatility, macroeconomic fundamentals and investor sentiment, employing a two-factor model to decompose volatility into a per- sistent long run component and a transitory short run component. Using a structural VAR model with Bayesian sign restrictions, we show that adverse shocks to aggregate demand and supply cause an in- crease in the persistent component of both stock and bond market volatility, and that adverse shocks to the persistent component of either stock or bond market volatility cause a deterioration in macroeco- nomic fundamentals. We find no evidence of a relationship between the transitory component of volatil- ity and macroeconomic fundamentals. Instead, we find that the transitory component is more closely associated with changes in investor sentiment. Our results are robust to a wide range of alternative spec- ifications. Out-of-sample forecasting shows that the components of volatility can improve forecasts of macroeconomic fundamentals, and vice versa.
Keywords : Stock and bond market volatility Two-factor volatility model Macroeconomic fundamentals Structural vector autoregression Bayesian estimation, UNSPECIFIED
Journal or Publication Title: Journal of Banking and Finance
Volume: 92
Item Type: Article
Subjects: Ekonomi Pembangunan
Depositing User: Elok Inajati
Date Deposited: 30 Dec 2019 04:36
Last Modified: 30 Dec 2019 04:36

Actions (login required)

View Item
View Item