Global price of risk and stabilization policies

Tobias Adrian, Daniel Stackman and Erik Vogt

No 786, Staff Reports from Federal Reserve Bank of New York

Abstract: We estimate a highly significant price of risk that forecasts global stock and bond returns as a nonlinear function of the CBOE Volatility Index (VIX). We show that countries? exposure to the global price of risk is related to macroeconomic risks as measured by output, credit, and inflation volatility, the magnitude of financial crises, and stock and bond market downside risk. Higher exposure to the global price of risk corresponds to both higher output volatility and higher output growth. We document that the transmission of the global price of risk to macroeconomic outcomes is mitigated by the magnitude of stabilization in the Taylor rule, the degree of countercyclicality of fiscal policy, and countries? tendencies to employ prudential regulations. The estimated magnitudes are quantitatively important and significant, with large cross-sectional explanatory power. Our findings suggest that macroeconomic and financial stability policies should be considered jointly.

Keywords: fiscal policy; financial stability; regulatory policy; monetary policy (search for similar items in EconPapers)
JEL-codes: G01 G12 G17 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-08-01
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-rmg
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Global Price of Risk and Stabilization Policies (2019)
Working Paper: Global Price of Risk and Stabilization Policies (2019)
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