Journal
JOURNAL OF BANKING & FINANCE
Volume 67, Issue -, Pages 103-118Publisher
ELSEVIER
DOI: 10.1016/j.jbankfin.2015.06.015
Keywords
Economic uncertainty; Risk aversion; Time variation in risk and return; Credit spread; Volatility dynamics; Financial stress
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Building on intuition from the dynamic asset pricing literature, we uncover unobserved risk aversion and fundamental uncertainty from the observed time series of the variance premium and the credit spread while controlling for the conditional variance of stock returns, expectations about the macroeconomic outlook, and interest rates. We apply this methodology to monthly data from both Germany and the US. We find that the variance premium contains a substantial amount of information about risk aversion whereas the credit spread has a lot to say about uncertainty. We link our risk aversion and uncertainty estimates to practitioner and academic risk aversion indices, sentiment indices, financial stress indices, business cycle indicators and liquidity measures. (C) 2015 Elsevier B.V. All rights reserved.
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