Financial Market Risk and Macroeconomic Stability Variables: Dynamic Interactions and Feedback Effects
Date of Award
Doctor of Business Administration (DBA)
Jack Welch College of Business
Dr. Lucjan Orlowski
Dr. Carolyne Soper
Dr. Michael Gorman
This study investigates dynamic interactions and feedback effects between financial market risk proxied by VIX and key macroeconomic stability variables that include the rate of unemployment, headline inflation and market-based inflation expectations reflected by the breakeven inflation. I argue that market risk should play a stronger role in macroeconomic modeling and forecasting than it has been recognized thus far in the literature. I employ vector autoregression with impulse response functions, as well as two-state Markov switching tests to examine these interactions on the longest available US monthly data. The empirical tests show that the association between market risk and macroeconomic fundamentals is predominantly neutral at normal, predictable economic conditions. It becomes however very pronounced at times of financial distress, in the environment of elevated market risk coupled with uncertain expectations for macroeconomic variables. Shocks in VIX have a longer impact on macroeconomic stability than that generally claimed in the prior literature. The Markov switching tests for CPI and breakeven inflation indicate that households and businesses are concerned primarily about episodes of increasing inflation, while bond market participants are worried mainly about declining inflation and deflation.
C54, E31, G17
Chomicz-Grabowska, A. M. (2019). Financial market risk and macroeconomic stability variables: Dynamic interactions and feedback effects. Jack Welch College of Business & Technology dissertation, Sacred Heart University, Fairfield CT.
Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.
Business Administration, Management, and Operations Commons, Growth and Development Commons, Macroeconomics Commons, Portfolio and Security Analysis Commons
Submitted in partial fulfillment of the requirements for the degree of Doctor of Business Administration in Finance, Sacred Heart University, Jack Welch College of Business & Technology.