Work

When volatility turns, recessions follow

Year: 2026

Type: article

Abstract: Do shifts into high stock-market volatility foreshadow recessions rather than merely accompany them? Prior work shows volatility rises in downturns and can help shorthorizon forecasts, but the timing of discrete volatility regime changes relative to business-cycle turning points is less understood. Using quarterly data for the United States, United Kingdom, Japan, Germany, Italy, and France (1960–2019; country-specific start dates), we estimate a bivariate Markov-switching model that jointly classifies high/low output growth and high/low return volatility, and tests restrictions on the transition structure. In the United States, United Kingdom, Japan, and France, entry into the high-volatility state typically precedes recession onset by one to two quarters. For Germany and Italy, the output and volatility state processes are approximately independent. These results suggest that volatility-regime switches are a mediumhorizon early-warning signal, consistent with uncertainty and risk-premium repricing that tighten funding conditions in more market-based financial systems.

Source: Economic Modelling

DOI: 10.1016/j.econmod.2026.107588

Authors: Delfina Ricordi, Martin Sola, Fabio Spagnolo, Nicola Spagnolo

Institutions: Massachusetts Institute of Technology, Universidad Torcuato Di Tella, University of Messina, University of Campania "Luigi Vanvitelli", Brunel University of London

Language: English

Topic: Market Dynamics and Volatility

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,660

Funder: European Commission