Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
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
ShareBar

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
→More Publications

More from the Authors

    • March 2023
    • Faculty Research

    Pershing Square's Pandemic Trade Teaching Note Courseware

    By: Luis M. Viceira and Emil N. Siriwardane
    • February 2023
    • Review of Financial Studies

    OTC Intermediaries

    By: Andrea L. Eisfeldt, Bernard Herskovic, Sriram Rajan and Emil Siriwardane
    • 2022
    • Faculty Research

    Shared Models in Networks, Organizations, and Groups

    By: Joshua Schwartzstein and Adi Sunderam
More from the Authors
  • Pershing Square's Pandemic Trade Teaching Note Courseware By: Luis M. Viceira and Emil N. Siriwardane
  • OTC Intermediaries By: Andrea L. Eisfeldt, Bernard Herskovic, Sriram Rajan and Emil Siriwardane
  • Shared Models in Networks, Organizations, and Groups By: Joshua Schwartzstein and Adi Sunderam
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College