1116 The Journal of finance causes a change in the volatility of stock returns. There have been many of Shiller's work, notably Kleidon(1986). Nevertheless, the literature volatility"has not addressed the question of why stock return volatility at some times than at others This paper characterizes the changes in stock market volatility through time In particular, it relates stock market volatility to the time-varying volatility of a variety of economic variables. Relative to the 1857-1987 period, volatility was unusually high from 1929 to 1939 for many economic series, including inflation money growth, industrial production, and other measures of economic activity Stock market volatility increases with financial leverage, as predicted by Black and Christie, although this factor explains only a small part of the variation in stock volatility. In addition, interest rate and corporate bond return volatility are correlated with stock return volatility. Finally, stock market volatility in creases during recessions. None of these factors, however, plays a dominant role explaining the behavior of stock volatility over time It is useful to think of the stock price, Pr as the discounted present value expected future cash flows to stockholders E-1P=E-1∑ (1 where Do+h is the capital gain plus dividends paid to stockholders in period t +k and 1/[1 R+hl is the discount rate for period t k based on information available at time t-1(Er-1 denotes the conditional expectation. )The conditional variance of the stock price at time t-1, var,-1(P), depends on the conditional variances of expected future cash flows and of future discount rates, and on the conditional covariances between these series. 1 At the aggregate level, the value of corporate equity clearly depends on the health of the economy. If discount rates are constant over time in(1),the conditional variance of security prices is proportional to the conditional variance of the expected future cash flows. Thus, it is plausible that a change in the level of uncertainty about future macroeconomic conditions would cause a proportional change in stock return volatility. If macroeconomic data provide information about the volatility of either future expected cash flows or future discount rates they can help explain why stock return volatility changes over time. "Fads"or bubbles"in stock prices would introduce additional sources of volatili Section I describes the time series properties of the data and the strategy for modeling time-varying volatility Section II analyzes the relations of stock and bond return volatility with the volatility of inflation, money growth, and indus trial production. Section III studies the relation between stock market volatility The variance of the sum of a sequence of ratios of random variables is not a simple function of the variances and covariances of the variables in the ratios, but standard asymptotic approximations depend on these parar " For a positively autocorrelated variable, such as the volatility series in Table Il, an unexpected ncrease in the variable implies an increase in expected future values of the series for many steps ahead. Given the discounting in(1), the volatility series will move almost proportionally. See Poterba and Summers(1986)for a simple model that posits a particular arima process for the behavior of the time-varying parameters in a related context