MACROECONOMIC VOLATILITY AND STOCK MARKET VOLATILITY; EMPIRICAL EVIDENCE ON FINNISH DATA

This project analyzes the relationship between conditional stock market volatility and macroeconomic volatility using monthly data for Finland from 1920 to 1991, and for Sweden from 1919 to 1991. Conditional monthly volatility is measured as simple weighted moving averages, and also obtained from GARCH-estimations. The results for Finland are surprisingly strong as compared to those on U.S. data, whereas they are weaker for Sweden. Significant results are obtained for stock market volatility as a predictor for macroeconomic volatility, as well as for the opposite. Tests of the joint and simultaneous explanatory power of the macroeconomic volatilities indicate that in the case of Finland, between one-sixth to above two thirds of the changes in aggregate stock volatility might be related to macroeconomic volatility. Also, some evidence of a negative relationship between stock market volatility and trading volume growth was also detected. This result could either be interpreted as an effect of idiosyncratic dem and shifts cancelling out as the thickness of the market is increasing, or as a sign of volume growth being some proxy for the level of economic activity.