Why Does Stock Market Volatility Change Over Time?
Read the paperopens doi.org in a new tab
What they found
Schwert assembled monthly U.S. stock volatility back to 1857 and asked what explains its swings. Volatility rose sharply during recessions and financial crises, was much higher in the 1930s than any other period, and correlated with volatility in bond returns, inflation, and industrial production, but the macro variables explained only a small share of the variation. Trading volume and financial leverage were more closely related. Volatility in 1987 was extreme but brief compared with the Great Depression.
What you can use
- Stock volatility roughly doubles in recessions; a strategy calibrated in calm times will be undersized for what a recession brings.
- Volatility has a long history of regimes; the 2008 and 2020 episodes have precedents, and the 1930s were worse.
- Volume and leverage track volatility more closely than fundamental news does.
Caveats
Monthly data over very long history with changing market structure. Descriptive rather than predictive.
Tags: volatility, long-history, recessions, regimes
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.