Business Cycles, Financial Crises and Stock Volatility
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
Carnegie-Rochester Conference Series on Public Policy, 31 (Autumn 1989) 83-125
This paper shows that stock volatility increases during recessions and financial crises from 1834-1987. The
evidence reinforces the notion that stock prices are an important business cycle indicator. Using two different
statistical models for stock volatility, I show that volatility increases after major financial crises. Moreover, stock
volatility decreases and stock prices rise before the Fed increases margin requirements. Thus, there is little reason to
believe that public policies can control stock volatility. The evidence supports the observation by Black [1976] that
stock volatility increases after stock prices fall.
Key words: Stock Market, Recession, Volatility, Leverage, ARIMA
JEL Classifications: G12, G14, E32
Cited 32 times in the SSCI through April 1996
© Copyright 1989, Elsevier
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