The role of aggregate risk aversion in the pricing of economic uncertainty

Kangyu Ren, Tianyu Qin and Yuandong Mu

Applied Economics Letters, 2023, vol. 30, issue 14, 1896-1903

Abstract: We find that time-varying aggregate risk aversion is a vital state variable to the pricing of economic uncertainty documented by Bali et al. (2017). Economic uncertainty is priced only during periods with a high aggregate risk aversion level. Risk aversion-related component in economic uncertainty contributes the major proportion of uncertainty premium. This proportion fluctuates with real economy, whereas the remaining varies with market sentiment. Uncertainty premium is most prominent following periods simultaneously having high aggregate risk aversion and high economic uncertainty.

Date: 2023
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DOI: 10.1080/13504851.2022.2083561

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