ABSTRACT

Main macroeconomic indicators have long been studied as determinants of the stock market volatility. It is plausible to consider that the stock market

indices are shaped, at least partly, by economic activities of a country. ere is a vast amount of literature on the relationship between stock markets and macroeconomic fundamentals. Beltratti and Morana (2006) attempts to fi nd an answer to the question raised by Schwert (1989) addressing the factors leading to the stock market volatility. ey analyze the macroeconomic causes of stock market volatility and conclude that the direction of causality is stronger from macroeconomic to stock market volatility while stock market volatility also aff ects macroeconomic volatility. e remarkable study by Schwert mainly examines the volatilities of the macroeconomic variables to fi gure out the preceding macro variables. Schwert fi nds that infl ation and money growth volatility predict stock market volatility, but only for some subperiod of the analysis, and industrial output volatility predicts the stock market volatility weakly. On the other hand, Schwert reports that stock market volatility helps predict money growth and industrial output volatility and does not help predict infl ation volatility. e fi ndings of Schwert can be criticized due to the use of econometric techniques which are more than two decades old. ese techniques could have suff ered from bias and have to be revised. To this end, Beltratti and Morana (2006) fi nd that the stochastic process volatility belonging to the U.S. stock market can be characterized by the structural change and long memory. With the help of the model including these features, they fi nd that the causality from macroeconomic volatility to the stock market volatility is stronger than the otherwise direction. Furthermore, the fractional cointegration analysis they conduct indicates that the cointegrating vectors link output growth, money growth, stock market return, the Federal funds rate, and infl ation volatility for the long run.