Publications
Publications
- August 2020
- Quarterly Journal of Economics
Financial Market Risk Perceptions and the Macroeconomy
By: Carolin E. Pflueger, Emil Siriwardane and Adi Sunderam
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).
About The Authors
