The Relationship Between Macroeconomic Volatility and Stock Market Volatility

This paper attempts to determine the relationship between conditional stock market volatility and macroeconomic volatility using monthly data for Turkey from 1986 to 2003. The macroeconomic variables used include industrial production, the money supply M1, inflation, an exchange rate variable, namely Turkish Lira / US Dollar and oil prices. Conditional monthly volatility is measured from GARCH estimations. The results show that volatility of money supply has a strong predictive power for stock market volatility while stock market volatility has a predictive power for exchange rates and inflation volatility. Tests of joint and simultaneous explanatory power of macroeconomic volatilities indicate that only volatility of industrial production and exchange rates have significant effect on stock market volatility and 6% of the changes in aggregate stock volatility might be related to macroeconomic volatility.