Volatility, the Macroeconomy and Asset Prices

54 Pages Posted: 25 May 2012

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Dana Kiku

University of Illinois at Urbana-Champaign

Ivan Shaliastovich

University of Wisconsin - Madison

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Date Written: May 2012

Abstract

We show that volatility movements have first-order implications for consumption dynamics and asset prices. Volatility news affects the stochastic discount factor and carries a separate risk premium. In the data, volatility risks are persistent and are strongly correlated with discount-rate news. This evidence has important implications for the return on aggregate wealth and the cross-sectional differences in risk premia. Estimation of our volatility risks based model yields an economically plausible positive correlation between the return to human capital and equity, while this correlation is implausibly negative when volatility risk is ignored. Our model setup implies a dynamics capital asset pricing model (DCAPM) which underscores the importance of volatility risk in addition to cash-flow and discount-rate risks. We show that our DCAPM accounts for the level and dispersion of risk premia across book-to-market and size sorted portfolios, and that equity portfolios carry positive volatility-risk premia.

Suggested Citation

Bansal, Ravi and Kiku, Dana and Shaliastovich, Ivan and Yaron, Amir, Volatility, the Macroeconomy and Asset Prices (May 2012). NBER Working Paper No. w18104, Available at SSRN: https://ssrn.com/abstract=2066401

Ravi Bansal (Contact Author)

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
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919-660-8038 (Fax)

Dana Kiku

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Ivan Shaliastovich

University of Wisconsin - Madison ( email )

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Madison, WI 53706-1481
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Amir Yaron

University of Pennsylvania -- Wharton School of Business ( email )

The Wharton School
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Philadelphia, PA 19104
United States
215-898-1241 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER) ( email )

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