Abstract:
This paper analyses the effect of supply constraints on international stock market volatility, while also considering its effect on stock returns. Using a higher-order nonparametric causality-in-quantiles test and daily data for China, France, Germany, Italy, Spain, the United Kingdom, the United States, and overall Europe, we find strong evidence of Granger causality flowing from supply constraints to the entire conditional distribution of stock returns and volatility. Notably, supply constraints positively predict stock volatility. This positive predictability remains robust when alternative measures are used, including monthly realized variance and different metrics of supply constraints. Our findings have significant implications for investors and policymakers.
