Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/210702
Authors: 
Crump, Richard K.
Giannone, Domenico
Hundtofte, Sean
Year of Publication: 
2018
Series/Report no.: 
Staff Report 850
Abstract: 
We show that realized volatility, especially the realized volatility of financial sector stock returns, has strong predictive content for the future distribution of market returns. This is a robust feature of the last century of U.S. data and, most importantly, can be exploited in real time. Current realized volatility has the most information content on the uncertainty of future returns, whereas it has only limited content about the location of the future return distribution. When volatility is low, the predicted distribution of returns is less dispersed and probabilistic forecasts are sharper. Given this finding on the importance of financial sector volatility not just to financial equity return uncertainty but to the broader market, we test for changes in the realized volatility of banks over a $50 billion threshold associated with more stringent Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) requirements. We find that the equity volatility of these large banks is differentially lower by 9 percentage points after Dodd-Frank compared to pre-crisis levels, controlling for changes over the same period for all banks and all large firms.
Subjects: 
stock returns
realized volatility
density forecasts
optimal pools
Dodd-Frank
financial intermediation
financial conditions
JEL: 
C22
G17
G18
Document Type: 
Working Paper

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