IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/2023-199.html
   My bibliography  Save this paper

The Market Price of Risk and Macro-Financial Dynamics

Author

Listed:
  • Mr. Tobias Adrian
  • Matthew DeHaven
  • Fernando Duarte
  • Tara Iyer

Abstract

We construct the Volatility Financial Conditions Index (VFCI) as the component of the market price of risk spanned by financial assets. We write a no-arbitrage model with general preferences to show how to estimate the VFCI from the conditional volatility of GDP, even when markets are incomplete. Empirically, the VFCI has greater predictive power than other FCIs for equity, Treasury, and corporate bond risk premia. Across multiple identification strategies, a VFCI shock that tightens financial conditions causes a persistent decline in output and an immediate monetary policy easing. Conversely, contractionary monetary policy shocks cause financial conditions to tighten.

Suggested Citation

  • Mr. Tobias Adrian & Matthew DeHaven & Fernando Duarte & Tara Iyer, 2023. "The Market Price of Risk and Macro-Financial Dynamics," IMF Working Papers 2023/199, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/199
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=539381
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tobias Adrian & Hongqi Chen & Max-Sebastian Dov`i & Ji Hyung Lee, 2025. "Machine-learning Growth at Risk," Papers 2506.00572, arXiv.org.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:imf:imfwpa:2023/199. 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: Akshay Modi (email available below). General contact details of provider: https://edirc.repec.org/data/imfffus.html .

    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.