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The risk aversion and uncertainty channels between finance and macroeconomics

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  • Nieto, Belén
  • Rubio, Gonzalo

Abstract

This paper shows how risk aversion and economic uncertainty affect the expected market risk premium. Under a habit preference macro-finance model with time-varying risk aversion, we show a significant amplifying effect of risk aversion on the expected market risk premium over and above economic uncertainty shocks. Although our full sample period is from January 1961 to March 2020, the results are robust to different sample periods and alternative estimation procedures, including the lower bound expected market risk premium based on option prices.

Suggested Citation

  • Nieto, Belén & Rubio, Gonzalo, 2022. "The risk aversion and uncertainty channels between finance and macroeconomics," Finance Research Letters, Elsevier, vol. 45(C).
    • Handle: RePEc:eee:finlet:v:45:y:2022:i:c:s1544612321002609
    DOI: 10.1016/j.frl.2021.102188
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    References listed on IDEAS

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    Cited by:

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    2. Dridi, Ichrak & Boughrara, Adel, 2023. "Flexible inflation targeting and stock market volatility: Evidence from emerging market economies," Economic Modelling, Elsevier, vol. 126(C).

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    More about this item

    Keywords

    Expected market risk premium; Risk aversion; Economic uncertainty; Counter-cyclical behavior;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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