Financial Market Risk Perceptions and the Macroeconomy

65 Pages Posted: 23 Sep 2019

See all articles by Carolin E. Pflueger

Carolin E. Pflueger

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

Emil Siriwardane

Harvard Business School - Finance Unit; Office of Financial Research

Aditya Sunderam

Harvard University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2019

Abstract

We propose a novel measure of risk perceptions: the price of volatile stocks (PVSt), defined as the book-to-market ratio of low-volatility stocks minus the book-to-market ratio of high-volatility stocks. PVSt is high when perceived risk directly measured from surveys and option prices is low. When perceived risk is high according to our measure, safe asset prices are high, risky asset prices are low, the cost of capital for risky firms is high, and real investment is forecast to decline. Perceived risk as measured by PVSt falls after positive macroeconomic news. These declines are predictably followed by upward revisions in investor risk perceptions. Our results suggest that risk perceptions embedded in stock prices are an important driver of the business cycle and are not fully rational.

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Suggested Citation

Pflueger, Carolin E. and Siriwardane, Emil and Sunderam, Aditya, Financial Market Risk Perceptions and the Macroeconomy (September 2019). NBER Working Paper No. w26290. Available at SSRN: https://ssrn.com/abstract=3458216

Carolin E. Pflueger (Contact Author)

University of Chicago - Harris School of 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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