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Industry-level stock returns volatility and aggregate economic activity in Australia

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  • Md. Arifur Rahman

Abstract

Drawing upon rationales from the theories of investment and consumption under uncertainty and the models of sectoral reallocation, we assess the implications of industry-level stock returns volatility for the future state of the Australian economy in terms of real Gross Domestic Product (GDP) growth, inflation and unemployment. By explicitly modelling the cyclical pattern of industry-level volatility and relating it to corresponding cyclical behaviour of macroeconomic variables, we show that industry-level volatility is a leading indicator of the movements in output growth and inflation. We find complementary evidence from a Vector Autoregression (VAR) based multi-step Granger causality test and impulse response analysis. However, the forecast error variance decompositions suggest that although the industry-level volatility accounts for a significant fraction of the forecast error of inflation, this explains only a small fraction of output and unemployment uncertainties. Further analysis indicates that industry-level volatility contains better information about the future state of the economy than does aggregate stock market volatility

Suggested Citation

  • Md. Arifur Rahman, 2009. "Industry-level stock returns volatility and aggregate economic activity in Australia," Applied Financial Economics, Taylor & Francis Journals, vol. 19(7), pages 509-525.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:7:p:509-525
    DOI: 10.1080/09603100802359968
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    1. Gerhard Bry & Charlotte Boschan, 1971. "Foreword to "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs"," NBER Chapters, in: Cyclical Analysis of Time Series: Selected Procedures and Computer Programs, pages -1, National Bureau of Economic Research, Inc.
    2. Gerhard Bry & Charlotte Boschan, 1971. "Cyclical Analysis of Time Series: Selected Procedures and Computer Programs," NBER Books, National Bureau of Economic Research, Inc, number bry_71-1.
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    Cited by:

    1. Thampanya, Natthinee & Wu, Junjie & Nasir, Muhammad Ali & Liu, Jia, 2020. "Fundamental and behavioural determinants of stock return volatility in ASEAN-5 countries," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).
    2. Bernard Ben Sita, 2013. "Volatility links between US industries," Applied Financial Economics, Taylor & Francis Journals, vol. 23(15), pages 1273-1286, August.
    3. Vu, Nam T., 2015. "Stock market volatility and international business cycle dynamics: Evidence from OECD economies," Journal of International Money and Finance, Elsevier, vol. 50(C), pages 1-15.
    4. Holmes, Mark J. & Maghrebi, Nabil, 2016. "Financial market impact on the real economy: An assessment of asymmetries and volatility linkages between the stock market and unemployment rate," The Journal of Economic Asymmetries, Elsevier, vol. 13(C), pages 1-7.

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