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Financial Market and Macroeconomic Volatility *1

- Relationships and Some Puzzles -

May 2000
Shinobu Nakagawa
Naoto Osawa

Views expressed in Working Paper Series are those of authors and do not necessarily reflect those of the Bank of Japan or Research and Statistics Department.
Questions and opinions on the working paper should be e-mailed to each author whose address is indicated in the document.

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This paper investigates whether the volatility in financial markets is interrelated and whether financial market volatility is related to macroeconomic variability by utilizing a VAR. After investigating Japan, the United States, the United Kingdom and Germany, this paper presents three findings. First, by and large stock and bond return volatility can help predict exchange rate volatility. Second, there is evidence that volatility in some financial markets can help explain the volatility of some macroeconomic measures. There is also evidence that the relationship works in the opposite direction. Finally, this paper identifies some puzzling characteristics of financial markets in Japan. Compared with other countries, Japan has experienced lower bond market volatility and higher foreign exchange volatility, both of which are not associated with macroeconomic volatility.

  • *1 The authors are grateful to Emi Arinaga for her research assistance. Views expressed in this paper are those of the authors and do not necessarily reflect those of the Bank of Japan or the Research and Statistics Department.