The Time Variation in Risk Appetite and Uncertainty

Geert Bekaert, Eric C. Engstrom and Nancy R. Xu

No 25673, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop measures of time-varying risk aversion and economic uncertainty that are calculated from financial variables at high frequencies. We formulate a dynamic no-arbitrage asset pricing model for equities and corporate bonds. The joint dynamics among asset-specific cash flows, macroeconomic fundamentals and risk aversion feature heteroskedasticity and non-Gaussianity. Variance risk premiums on equity are very informative about risk aversion, whereas credit spreads and corporate bond volatility are highly correlated with economic uncertainty. Model-implied risk premiums outperform standard instruments for predicting excess returns on equity and corporate bonds. A financial proxy to our economic uncertainty predicts output growth significantly negatively.

JEL-codes: C01 G10 G12 G13 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-rmg and nep-upt
Note: AP
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Citations: View citations in EconPapers (53)

Published as Geert Bekaert & Eric C. Engstrom & Nancy R. Xu, 2022. "The Time Variation in Risk Appetite and Uncertainty," Management Science, vol 68(6), pages 3975-4004.

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