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

58 Pages Posted: 20 Jun 2015 Last revised: 17 Sep 2015

Geert Bekaert

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Marie Hoerova

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 12, 2015

Abstract

Building on intuition from the dynamic asset pricing literature, we uncover unobserved risk aversion and fundamental uncertainty from the observed time series of the variance premium and the credit spread while controlling for the conditional variance, expectations about the macroeconomic outlook, and interest rates. We apply this methodology to monthly data from both Germany and the US. We find that the variance premium contains a substantial amount of information about risk aversion whereas the credit spread has a lot to say about uncertainty. We link our risk aversion and uncertainty estimates to practitioner and "academic" risk aversion indices, sentiment indices, financial stress indices, business cycle indicators and liquidity measures.

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

JEL Classification: G12; E44

Suggested Citation

Bekaert, Geert and Hoerova, Marie, What Do Asset Prices Have to Say About Risk Appetite and Uncertainty? (June 12, 2015). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2620228 or http://dx.doi.org/10.2139/ssrn.2620228

Geert Bekaert

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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 )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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