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In a previous post, we showed a negative correlation between the stock market and colleague Bob Whaley's "Volatility Index," VIX.
Recent research shows that volatility spikes are a good predictor of future recessions because:
- When people are uncertain about the future, they wait and do nothing.
- Firms do not to hire new employees, or invest in new equipment if they are uncertain about future demand.
- Consumers do not buy a new car, a new TV, or refurnish their house if they are uncertain about their next paycheck.
The economy grinds to a halt while everyone waits.
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For related work, see Bob Higgs's classic paper on "Regime Uncertainty" and how it prolonged the Great Depression:
ReplyDeletehttp://www.independent.org/publications/tir/article.asp?a=430
I didn't know that uncertainty could lead to recession. But I know that the consumer's purchasing power somehow affects economy and market. I just hope that the US economy will eventually recover and the effects of recession would be eliminated.
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Perception recession?
ReplyDeleteI am sure everyone knows this...
Recession - My neighbor loses his job
Depression - I lose my job
Great depression - My wife & I, both work for the same company - lose our jobs ;-)
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