Credit Standards: A New Predictor of U.S. Stock Market Realized Volatility

We introduce credit standards from the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) as a novel predictor of U.S. stock market realized volatility over 1990:04-2024:12. We show that tighter credit standards significantly predict higher realized volatility both in- and out-of-sample at one-, three-, and six-month-ahead horizons. A parsimonious model with only the credit standards factor outperforms more complex specifications incorporating macroeconomic factors, uncertainty indexes, and realized moments, estimated via elastic-net and random forest methods, with forecasting gains increasing at longer horizons. These findings establish credit standards as a powerful and distinct predictor of stock market volatility with practical implications for portfolio allocation and risk management.