ABSTRACT
By utilizing the significance and stochastic dominance tests, this paper formally tests the relationship between stock market volatility and the business cycle. Results show that, for most matured markets, stock market volatility is countercyclical, while for emerging markets, the volatility can be procyclical.
Acknowledgement
Yu You is grateful for the financial support from the National Science Foundation of China (No. 71,703,107) and the Humanities and Social Science Research Project of the Ministry of Education of China (No. 16YJC790035).
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 The studies on this are too numerous to be fully cited. A few studies include but are not limited to Schwert (Citation1989), Campbell and Cochrane (Citation1999), Bekaert and Wu (Citation2000), Brandt and Kang (Citation2004), Li (Citation2007), Mele (Citation2007), Henkel, Martin, and Nardari (Citation2011), and Choudhry, Papadimitriou, and Shabi (Citation2016).
2 Excess return is calculated by subtracting U.S. one-month T-bill rate from the monthly log return of stock index. The use of daily and weekly data yields almost identical results.
3 Data for Austria and Turkey are from MSCI.
4 See Brandt and Kang (Citation2004) for a review of the literature. We also consider a version without GARCH-in-mean effect, which yields very similar results.
5 See Bernal, Gnabo, and Guilmin (Citation2014) for a detailed discussion of the bootstrap KS test.
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Funding
This work was supported by the Ministry of Education of the People’s Republic of China [16YJC790035] and the National Natural Science Foundation of China [71703107].
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