Premium
Volatility, the Macroeconomy, and Asset Prices
Author(s) -
BANSAL RAVI,
KIKU DANA,
SHALIASTOVICH IVAN,
YARON AMIR
Publication year - 2014
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12110
Subject(s) - economics , volatility risk premium , volatility (finance) , volatility swap , volatility smile , implied volatility , volatility risk , risk premium , stochastic volatility , monetary economics , cash flow , forward volatility , econometrics , financial economics , finance
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.