1 Introduction
The opinion that volatility of financial markets has a negative impact on the
real economy lies at the heart of proposals such as the Tobin Tax. Following
Keynes (1936), many economists argue that uncertainty can negatively affect in-
vestment, pushing firms to delay the instalment of new capital.1 Nevertheless, the
impact of volatility on asset prices and, eventually, on real quantities, is essen-
tially an empirical issue, and not entirely settled. Poterba and Summers (1986)
show that changes in risk premia, reflecting volatility, have a modest impact on
stock prices, since risk premia are stationary. French et al. (1987), on the contrary,
find that the expected market risk premium is positively related to the volatility of
stock returns. Their results are confirmed by Chou (1988) who, by estimating the
volatility by means of GARCH techniques, finds that volatility is highly persistent.
In two separate studies Schwert (1989, 2002) suggests that stock market volatil-
ity is a leading indicator for economic activity, with heightened volatility often
associated with recessions, and that clusters of high volatility are explained, to a
large extent, by technological shocks.
Overall the literature on volatility and returns suggests that clusters of high
volatility are normally concentrated in periods of low returns, and anticipate reces-
sions or other (technological) shocks affecting the real economy. On the contrary,
there is no clear-cut evidence that stock market volatility affects real variables
1Keynes’ argument is that while individual shareholders can liquidate their investments, the
society as whole cannot, so that firm managers are constrained by the short-term fluctuations of
share prices due to speculative activity.