IDEAS home Printed from https://ideas.repec.org/a/oup/qjecon/v135y2020i3p1443-1491..html

Financial Market Risk Perceptions and the Macroeconomy

Author

Listed:
  • Carolin Pflueger
  • Emil Siriwardane
  • Adi Sunderam

Abstract

We provide evidence that financial market risk perceptions are important drivers of economic fluctuations. We introduce a novel measure of risk perceptions: the price of volatile stocks (PVSt), defined as the book-to-market ratio of low-volatility stocks minus the book-to-market ratio of high-volatility stocks. PVSt is high when perceived risk directly measured from surveys and option prices is low. Using our measure, we show that high perceived risk is associated with low risk-free interest rates, a high cost of capital for risky firms, and future declines in output and real investment. Perceived risk as measured by PVSt falls after positive macroeconomic news. These declines are predictably followed by upward revisions in perceived risk, indicating that fluctuations in investor risk perceptions are not fully rational.

Suggested Citation

  • Carolin Pflueger & Emil Siriwardane & Adi Sunderam, 2020. "Financial Market Risk Perceptions and the Macroeconomy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(3), pages 1443-1491.
    • Handle: RePEc:oup:qjecon:v:135:y:2020:i:3:p:1443-1491.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/qje/qjaa009
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:qjecon:v:135:y:2020:i:3:p:1443-1491.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://academic.oup.com/qje .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.