The risk aversion and uncertainty channels between finance and macroeconomics

Belén Nieto and Gonzalo Rubio

Finance Research Letters, 2022, vol. 45, issue C

Abstract: This paper shows how risk aversion and economic uncertainty affect the expected market risk premium. Under a habit preference macro-finance model with time-varying risk aversion, we show a significant amplifying effect of risk aversion on the expected market risk premium over and above economic uncertainty shocks. Although our full sample period is from January 1961 to March 2020, the results are robust to different sample periods and alternative estimation procedures, including the lower bound expected market risk premium based on option prices.

Keywords: Expected market risk premium; Risk aversion; Economic uncertainty; Counter-cyclical behavior (search for similar items in EconPapers)
JEL-codes: E32 G11 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:45:y:2022:i:c:s1544612321002609

DOI: 10.1016/j.frl.2021.102188

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