Volatility, the Macroeconomy, and Asset Prices

Ravi Bansal, Dana Kiku, Ivan Shaliastovich and Amir Yaron

Journal of Finance, 2014, vol. 69, issue 6, 2471-2511

Abstract: type="main">

How important are volatility fluctuations for asset prices and the macroeconomy? We find that an increase in macroeconomic volatility is associated with an increase in discount rates and a decline in consumption. We develop a framework in which cash flow, discount rate, and volatility risks determine risk premia and show that volatility plays a significant role in explaining the joint dynamics of returns to human capital and equity. Volatility risk carries a sizable positive risk premium and helps account for the cross section of expected returns. Our evidence demonstrates that volatility is important for understanding expected returns and macroeconomic fluctuations.

Date: 2014
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Working Paper: Volatility, the Macroeconomy and Asset Prices (2012)
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