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Stock market volatility and business cycle: Evidence from linear and nonlinear causality tests

Author

Listed:
  • Choudhry, Taufiq
  • Papadimitriou, Fotios I.
  • Shabi, Sarosh

Abstract

This paper investigates the relationship between stock market volatility and the business cycle in four major economies, namely the US, Canada, Japan and the UK. We employ both linear and nonlinear bivariate causality tests and we further conduct a multivariate analysis to explore possible spillover effects across countries. Our results suggest that there is a bidirectional causal relationship between stock market volatility and the business cycle within each country and additionally reveal that the recent financial crisis plays an important role in this context. Finally, we identify a significant impact of the US on the remaining markets.

Suggested Citation

  • Choudhry, Taufiq & Papadimitriou, Fotios I. & Shabi, Sarosh, 2016. "Stock market volatility and business cycle: Evidence from linear and nonlinear causality tests," Journal of Banking & Finance, Elsevier, vol. 66(C), pages 89-101.
    • Handle: RePEc:eee:jbfina:v:66:y:2016:i:c:p:89-101
    DOI: 10.1016/j.jbankfin.2016.02.005
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    More about this item

    Keywords

    Stock market volatility; Business cycle; Bivariate causality; Multivariate causality; Linear and nonlinear causality tests;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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