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Publications
Publications
  • August 2020
  • Article
  • Quarterly Journal of Economics

Financial Market Risk Perceptions and the Macroeconomy

By: Carolin E. Pflueger, Emil Siriwardane and Adi Sunderam
  • Format:Print
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Abstract

We propose a novel measure of risk perceptions: the price of volatile stocks (PVS), defined as the book-to-market ratio of low-volatility stocks minus the book-to-market ratio of high-volatility stocks. PVS is high when perceived risk directly measured from surveys and option prices is low. When perceived risk is high according to our measure, safe asset prices are high, risky asset prices are low, the cost of capital for risky firms is high, and real investment is forecast to decline. Perceived risk as measured by PVS falls after positive macroeconomic news. These declines are predictably followed by upward revisions in investor risk perceptions. Our results suggest that risk perceptions embedded in stock prices are an important driver of the business cycle and are not fully rational.

Keywords

Risk-centric Business Cycles; Cross-section Of Equities; Real Risk-free Rate; Real Investment; Financial Markets; Risk and Uncertainty; Perception; Investment

Citation

Pflueger, Carolin E., Emil Siriwardane, and Adi Sunderam. "Financial Market Risk Perceptions and the Macroeconomy." Quarterly Journal of Economics 135, no. 3 (August 2020).
  • Find it at Harvard

About The Authors

Emil N. Siriwardane

Finance
→More Publications

Adi Sunderam

Finance
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More from the Authors

    • 2022
    • Faculty Research

    The Impact of Minority Representation at Mortgage Lenders

    By: W. Scott Frame, Ruidi Huang, Erik J. Mayer and Adi Sunderam
    • Review of Financial Studies

    The Cross Section of Bank Value

    By: Mark Egan, Stefan Lewellen and Adi Sunderam
    • 2021
    • Faculty Research

    Segmented Arbitrage

    By: Emil Siriwardane, Adi Sunderam and Jonathan Wallen
More from the Authors
  • The Impact of Minority Representation at Mortgage Lenders By: W. Scott Frame, Ruidi Huang, Erik J. Mayer and Adi Sunderam
  • The Cross Section of Bank Value By: Mark Egan, Stefan Lewellen and Adi Sunderam
  • Segmented Arbitrage By: Emil Siriwardane, Adi Sunderam and Jonathan Wallen
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