Volatility, the Macroeconomy and Asset Prices

67 Pages Posted: 1 Dec 2014

See all articles by Amir Yaron

Amir Yaron

University of Pennsylvania -- Wharton School of Business; National Bureau of Economic Research (NBER)

Dana Kiku

University of Illinois at Urbana-Champaign

Ivan Shaliastovich

University of Wisconsin - Madison

Ravi Bansal

Duke University

Date Written: 2014

Abstract

How important are volatility fluctuations for asset prices and the macroeconomy? We find that a rise in macroeconomic volatility is associated with a rise in discount rates and a decline in consumption. To study the impact of volatility we provide a framework in which cashflow, discount-rate, and volatility risks determine risk premia. We show that volatility plays a significant role in jointly accounting for returns to human capital and equity. Volatility risks carry a sizeable positive risk premium and help explain the cross-section of expected returns. Our evidence shows that volatility is important for understanding expected returns and macroeconomic fluctuations.

JEL Classification: E21, G12

Suggested Citation

Yaron, Amir and Kiku, Dana and Shaliastovich, Ivan and Bansal, Ravi, Volatility, the Macroeconomy and Asset Prices (2014). Journal of Finance, Vol. 69, No. 6, 2014, Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3677286 or http://dx.doi.org/10.2139/ssrn.3677286

Amir Yaron (Contact Author)

University of Pennsylvania -- Wharton School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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Dana Kiku

University of Illinois at Urbana-Champaign ( email )

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Champaign, IL 61820
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Ivan Shaliastovich

University of Wisconsin - Madison ( email )

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Madison, WI 53706-1481
United States

Ravi Bansal

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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