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What do asset prices have to say about risk appetite and uncertainty?

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Author Info

  • Bekaert, Geert
  • Hoerova, Marie
  • Scheicher, Martin

Abstract

Implied volatility indices should have information about risk parameters, once they are cleansed of the influence of normal volatility dynamics and macro-economic uncertainty. Building on intuition from the dynamic asset pricing literature, we uncover unobserved risk aversion and fundamental uncertainty from the observed time series of the VIX and the credit spreads while controlling for realized volatility, expectations about the macroeconomic outlook, and interest rates. We apply this methodology to monthly data from both Germany and the US. We find that implied volatilities contain a substantial amount of information regarding risk aversion whereas credit spreads have a lot to say about both risk aversion and uncertainty. Moreover, there is a significant comovement in the German and US risk aversion. JEL Classification:

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1037.

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Date of creation: Mar 2009
Date of revision:
Handle: RePEc:ecb:ecbwps:20091037

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Related research

Keywords: Credit Spread; Economic uncertainty; risk aversion; Time variation in risk and return; Volatility dynamics;

This paper has been announced in the following NEP Reports:

References

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Citations

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Cited by:
  1. Mehl, Arnaud, 2013. "Large global volatility shocks, equity markets and globalisation: 1885-2011," Working Paper Series 1548, European Central Bank.
  2. Kim, Don H. & Loretan, Mico & Remolona, Eli M., 2010. "Contagion and risk premia in the amplification of crisis: Evidence from Asian names in the global CDS market," Journal of Asian Economics, Elsevier, vol. 21(3), pages 314-326, June.
  3. Juan M. Londono, 2011. "The variance risk premium around the world," International Finance Discussion Papers 1035, Board of Governors of the Federal Reserve System (U.S.).

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