EconPapers    
Economics at your fingertips  
 

The Identification of Non-Rational Risk Shocks

Maximilian Böck

Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics

Abstract: This paper studies how non-rational risk shocks affect the macroeconomy. Using a novel identification design which exploits survey data on expectations of financial executives in the US, I identify non-rational risk shocks via distortions in beliefs. Belief distortions are measured through surprises in beliefs of credit spreads, defined as the difference between subjective and objective forecasts. They are then used as a proxy for exogenous variation in the risk premium. Belief distortions elicit due to overreaction of credit spreads, eventually leading to exaggerated beliefs on financial markets. Results indicate that the constructed shocks have statistically and economically meaningful effects. This has sizeable consequences for the U.S. economy: A positive non-rational risk shock moves credit spreads remarkably while real activity and the stock market decline.

Keywords: Business Cycles; Risk Shocks; Belief Distortions (search for similar items in EconPapers)
JEL-codes: C32 E32 E44 E71 G41 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-cwa, nep-fdg and nep-mac
Note: PDF Document
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://epub.wu.ac.at/8197/1/wp314.pdf (application/pdf)

Related works:
Working Paper: The Identification of Non-Rational Risk Shocks (2021) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wiw:wiwwuw:wuwp314

Access Statistics for this paper

More papers in Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics Welthandelsplatz 1, 1020 Vienna, Austria.
Bibliographic data for series maintained by Department of Economics ().

 
Page updated 2022-07-05
Handle: RePEc:wiw:wiwwuw:wuwp314