A Measure of Risk Appetite for the Macroeconomy

55 Pages Posted: 23 Apr 2018

See all articles by Carolin E. Pflueger

Carolin E. Pflueger

University of Chicago - Harris Public Policy; National Bureau of Economic Research (NBER)

Emil Siriwardane

Harvard Business School - Finance Unit; Office of Financial Research

Aditya Sunderam

Harvard University

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.

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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

Carolin E. Pflueger (Contact Author)

University of Chicago - Harris Public Policy ( email )

1155 East 60th Street
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Emil Siriwardane

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States

Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

Aditya Sunderam

Harvard University ( email )

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