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    A Measure of Risk Appetite for the Macroeconomy
    18 Jun 2018Working Paper Summaries

    A Measure of Risk Appetite for the Macroeconomy

    by Carolin E. Pflueger, Emil Siriwardane, and Adi Sunderam
    This paper sheds new light on connections between financial markets and the macroeconomy. It shows that investors’ appetite for risk—revealed by common movements in the pricing of volatile securities—helps determine economic outcomes and real interest rates.
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    Author Abstract

    We document a strong and robust positive relationship between real rates and the contemporaneous valuation of volatile stocks, which we contend measures the economy’s risk appetite. Our novel proxy for risk appetite explains 41% of the variation in the one-year real rate since 1970, while the valuation of the aggregate stock market explains just 1%. In addition, the real rate forecasts returns on volatile stocks, confirming our interpretation that changes in risk appetite drive the real rate. Increases in our measure of risk appetite are followed by a boom in investment and output.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: April 2018
    • HBS Working Paper Number: NBER Working Paper Series, No. 24529
    • Faculty Unit(s): Finance
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    Emil N. Siriwardane
    Emil N. Siriwardane
    Finnegan Family Associate Professor of Business Administration
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    Adi Sunderam
    Adi Sunderam
    Willard Prescott Smith Professor of Corporate Finance
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