Does Aggregate Riskiness Predict Future Economic Downturns?

Turan G. Bali, Nusret Cakici and Fousseni Chabi-Yo
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Turan G. Bali: Georgetown University
Nusret Cakici: Fordham University
Fousseni Chabi-Yo: OH State University

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: Aumann and Serrano (2008) and Foster and Hart (2009) introduce riskiness measures based on the physical return distribution of gambles. This paper proposes model-free options' implied measures of riskiness based on the risk-neutral distribution of financial securities. In addition to introducing the forward-looking measures of riskiness, the paper investigates the significance of aggregate riskiness in predicting future economic downturns. The results indicate strong predictive power of aggregate riskiness even after controlling for the realized volatility of the U.S. equity market, the implied volatility of S&P 500 index options (VIX) proxying for financial market uncertainty, as well as the TED spread proxying for interbank credit risk and the perceived health of the banking system.

JEL-codes: G11 G12 G14 G33 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-for and nep-rmg
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Citations: View citations in EconPapers (8)

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