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Volatility, the Macroeconomy, and Asset Prices

Author

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  • RAVI BANSAL
  • DANA KIKU
  • IVAN SHALIASTOVICH
  • AMIR YARON

Abstract

type="main"> How important are volatility fluctuations for asset prices and the macroeconomy? We find that an increase in macroeconomic volatility is associated with an increase in discount rates and a decline in consumption. We develop a framework in which cash flow, discount rate, and volatility risks determine risk premia and show that volatility plays a significant role in explaining the joint dynamics of returns to human capital and equity. Volatility risk carries a sizable positive risk premium and helps account for the cross section of expected returns. Our evidence demonstrates that volatility is important for understanding expected returns and macroeconomic fluctuations.

Suggested Citation

  • Ravi Bansal & Dana Kiku & Ivan Shaliastovich & Amir Yaron, 2014. "Volatility, the Macroeconomy, and Asset Prices," Journal of Finance, American Finance Association, vol. 69(6), pages 2471-2511, December.
    • Handle: RePEc:bla:jfinan:v:69:y:2014:i:6:p:2471-2511
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    File URL: http://hdl.handle.net/10.1111/jofi.12110
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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • G0 - Financial Economics - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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