imprint:
Cambridge, Mass: National Bureau of Economic Research, 2019
Published in:NBER working paper series ; no. w26290
Extent:
1 Online-Ressource; illustrations (black and white)
Language:
English
DOI:
10.3386/w26290
Identifier:
Reproduction note:
Hardcopy version available to institutional subscribers
Origination:
Footnote:
System requirements: Adobe [Acrobat] Reader required for PDF files
Mode of access: World Wide Web
Description:
We propose a novel measure of risk perceptions: the price of volatile stocks (PVS<sub>t</sub>), defined as the book-to-market ratio of low-volatility stocks minus the book-to-market ratio of high-volatility stocks. PVS<sub>t</sub> is high when perceived risk directly measured from surveys and option prices is low. When perceived risk is high according to our measure, safe asset prices are high, risky asset prices are low, the cost of capital for risky firms is high, and real investment is forecast to decline. Perceived risk as measured by PVS<sub>t</sub> falls after positive macroeconomic news. These declines are predictably followed by upward revisions in investor risk perceptions. Our results suggest that risk perceptions embedded in stock prices are an important driver of the business cycle and are not fully rational