When Volatility Turns, Recessions Follow

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 medium horizon early-warning signal, consistent with uncertainty and risk-premium repricing that tighten funding conditions in more market-based financial systems.