NBER Publications by Alexander David

Investors' option-implied fear measures – implied volatility (ATMIV) and put-call implied volatility ratios (P/C) – lead key macroeconomic variables such as industrial capacity utilization and short term interest rates by up to eight quarters. We show that this interaction between fear indices, real activity, and policy variables arises in an equilibrium model where investors learn about the trend-growth regimes of economic data, and the central bank uses a learning-based Taylor rule. The model endogenously generates several time series properties of option prices including the counter (pro) cyclicality of ATMIV (P/C), the V-shape (inverse V-shape) relation between ATMIV (P/C) and monetary policy variables, the positive relation between the level and absolute changes in ATMIV, and an econo...

The relation between the volatility of stocks and bonds and their price valuations is strongly time-varying, both in magnitude and direction, defying traditional asset pricing models and conventional wisdom. We construct and estimate a model in which investors' learning about regular and unusual fundamental states leads to a non-monotonic V-shaped relation between volatilities and prices. Structural forecasts from our model predict future return volatility and covariances with R2 ranging between 40% and 60% at the 1-year horizon. The model's success stems largely from backing out the endogenous and time-varying pro (counter) cyclical weights that investors assign to earnings (inflation) news.