A Measure of Risk Appetite for the Macroeconomy
55 Pages Posted: 23 Apr 2018
Date Written: April 2018
Abstract
We document a strong and robust positive relationship between real rates and the contemporaneous valuation of volatile stocks, which we contend measures the economy’s risk appetite. Our novel proxy for risk appetite explains 41% of the variation in the one-year real rate since 1970, while the valuation of the aggregate stock market explains just 1%. In addition, the real rate forecasts returns on volatile stocks, confirming our interpretation that changes in risk appetite drive the real rate. Increases in our measure of risk appetite are followed by a boom in investment and output.
Suggested Citation: Suggested Citation
Pflueger, Carolin E. and Siriwardane, Emil and Sunderam, Aditya, A Measure of Risk Appetite for the Macroeconomy (April 2018). NBER Working Paper No. w24529, Available at SSRN: https://ssrn.com/abstract=3167043
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