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What Do Asset Prices Have to Say About Risk Appetite and Uncertainty?

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Author Info
Geert Bekaert () (Columbia Business School, 3022 Broadway, New York, NY 10027, USA.)
Marie Hoerova () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
Martin Scheicher () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)

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Abstract

Implied volatility indices should have information about risk parameters, once they are cleansed of the influence of normal volatility dynamics and macroeconomic 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: G12, E44.

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

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Length: 47 pages
Date of creation: Mar 2009
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Handle: RePEc:ecb:ecbwps:20091037

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Related research
Keywords: Economic uncertainty; Risk aversion; Time variation in risk and return; Credit spread; Volatility dynamics.;

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jens Eisenschmidt & Astrid Hirsch & Tobias Linzert, 2009. "Bidding behaviour in the ECB's main refinancing operations during the financial crisis," Working Paper Series 1052, European Central Bank. [Downloadable!]
  2. Luca Agnello & Ricardo M. Sousa, 2009. "The determinants of public deficit volatility," Working Paper Series 1042, European Central Bank. [Downloadable!]
    Other versions:
  3. Matthieu Darracq Pariès & Stéphane Moyen, 2009. "Monetary Policy and Inflationary Shocks Under Imperfect Credibility," Working Paper Series 1065, European Central Bank. [Downloadable!]
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