Volatility, the Macroeconomy, and Asset Prices

  • Author(s): RAVI BANSAL, DANA KIKU, IVAN SHALIASTOVICH, AMIR YARON
  • Published: Sep 30, 2013
  • DOI: 10.1111/jofi.12110

ABSTRACT

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.

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