What Do Asset Prices Have to Say about Risk Appetite and Uncertainty?

47 Pages Posted: 15 Apr 2009

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Martin Scheicher

European Central Bank (ECB)

Multiple version iconThere are 2 versions of this paper

Date Written: March 31, 2009

Abstract

Implied volatility indices should have information about risk parameters, once they are cleansed of the influence of normal volatility dynamics and macroeconomic uncertainty. Building on intuition from the dynamic asset pricing literature, we uncover unobserved risk aversion and fundamental uncertainty from the observed time series of the VIX and the credit spreads while controlling for realized volatility, expectations about the macro-economic outlook, and interest rates. We apply this methodology to monthly data from both Germany and the US. We find that implied volatilities contain a substantial amount of information regarding risk aversion whereas credit spreads have a lot to say about both risk aversion and uncertainty. Moreover, there is a significant comovement in the German and US risk aversion.

Keywords: Economic uncertainty, Risk aversion, Time variation in risk and return, Credit spread, Volatility dynamics

JEL Classification: G12, E44

Suggested Citation

Bekaert, Geert and Hoerova, Marie and Scheicher, Martin, What Do Asset Prices Have to Say about Risk Appetite and Uncertainty? (March 31, 2009). ECB Working Paper No. 1037. Available at SSRN: https://ssrn.com/abstract=1358848

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Marie Hoerova (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Martin Scheicher

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 (Phone)
+49 69 1344 7949 (Fax)

HOME PAGE: http://www.ecb.europa.eu

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