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Do Periods of Extreme Asset Price Volatility Signal the Beginning of a Recession? An International Comparison

Author

Listed:
  • Delfina Ricordi
  • Martín Sola
  • Fabio Spagnolo
  • Nicola Spagnolo

Abstract

This paper investigates the relationship between financial markets and real economic activity. Based on a bivariate Markov switching model, we propose a procedure for analysing links between stock market volatility and output growth. The method provides a convenient way of interpreting the predictive content of different series’ first and second moments. We examine and discuss an empirical application of this procedure for a subset of developed countries (U.S., U.K., Japan, Germany, Italy and France). In the empirical analysis, we test whether changes in stock market volatility precede the change in the state of output growth.

Suggested Citation

  • Delfina Ricordi & Martín Sola & Fabio Spagnolo & Nicola Spagnolo, 2025. "Do Periods of Extreme Asset Price Volatility Signal the Beginning of a Recession? An International Comparison," Department of Economics Working Papers 2025_03, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2025_03
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    More about this item

    Keywords

    Volatility of Stock Prices; Booms and Recessions; Markov Switching.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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