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Financial Market and Macroeconomic Volatility - Relationships and Some Puzzles -

Author

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  • Shinobu Nakagawa

    (Bank of Japan)

  • Naoto Osawa

    (Bank of Japan)

Abstract

This paper investigates whether the volatility in financial markets is interrelated and whether financial market volatility is related to macroeconomic variability by utilizing a VAR. After investigating Japan, the United States, the United Kingdom and Germany, this paper presents three findings. First, by and large stock and bond return volatility can help predict exchange rate volatility. Second, there is evidence that volatility in some financial markets can help explain the volatility of some macroeconomic measures. There is also evidence that the relationship works in the opposite direction. Finally, this paper identifies some puzzling characteristics of financial markets in Japan. Compared with other countries, Japan has experienced lower bond market volatility and higher foreign exchange volatility, both of which are not associated with macroeconomic volatility.

Suggested Citation

  • Shinobu Nakagawa & Naoto Osawa, 2000. "Financial Market and Macroeconomic Volatility - Relationships and Some Puzzles -," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    • Handle: RePEc:boj:bojwps:00-e-9r
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    References listed on IDEAS

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    1. Arturo Estrella & Frederic S. Mishkin, 1995. "The term structure of interest rates and its role in monetary policy for the European Central Bank," Research Paper 9526, Federal Reserve Bank of New York.
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    3. Michael D. McKenzie, 1999. "The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 71-106, February.
    4. Hideaki Hirata & Kazuo Ueda, 1998. "The Yield Spread as a Predictor of Japanese Recessions," Bank of Japan Working Paper Series Research and Statistics D, Bank of Japan.
    5. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
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    Cited by:

    1. Bauer, Rob & Derwall, Jeroen & Molenaar, Roderick, 2004. "The real-time predictability of the size and value premium in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 12(5), pages 503-523, November.
    2. Weihua Shi & Larry Eisenberg & Cheng-few Lee, 2009. "Intraday Patterns, Announcement Effects, and Volatility Persistence in the Japanese Government Bond Futures Market," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 12(01), pages 63-85.

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