Are financial returns considered more volatile in recessionary times as opposed to expansionary times?

Question

I need help in understanding some results that I have obtained.

I am doing some out-of-sample performance analysis for different targets of volatility in mean-variance optimization where I solely change the way the covariance matrix has been estimated. HC in the figure refers to the sample covariance matrix, whereas GS refers to the Gerber-Statistic based covariance matrix (see here) which is supposedly more robust to outliers and noise in the data.

Now, if we observe the below figures, one can see that the risk-adjusted-return (adjusted according to HC) for GS is generally lower in expansionary times while its much higher in recessionary times. Now, a plausible explanation for this is that GS works better under more volatile times influenced by noise and outliers. However, I can't find any theories that support the fact that returns are more volatile in recessionary times, compared to expansionary times. Do you have any ideas regarding this matter?

Answer 1

See http://www.princeton.edu/~yacine/leverage.pdf

The leverage effect refers to the observed tendency of an asset’s volatility to be negatively correlated with the asset’s returns. Typically, rising asset prices are accompanied by declining volatility, and vice versa. The term “leverage” refers to one possible economic interpretation of this phenomenon, developed in Black (1976) and Christie (1982): as asset prices decline, companies become mechanically more leveraged since the relative value of their debt rises relative to that of their equity. As a result, it is natural to expect that their stock becomes riskier, hence more volatile.