Harvard Business School
Baker LIbrary 261
Boston, MA 02163
Institutional Affiliation: Harvard University
NBER Working Papers and Publications
|April 2018||A Measure of Risk Appetite for the Macroeconomy|
with Carolin Pflueger, Adi Sunderam: w24529
We document a strong and robust positive relationship between real rates and the contemporaneous valuation of volatile stocks, which we contend measures the economy’s risk appetite. Our novel proxy for risk appetite explains 41% of the variation in the one-year real rate since 1970, while the valuation of the aggregate stock market explains just 1%. In addition, the real rate forecasts returns on volatile stocks, confirming our interpretation that changes in risk appetite drive the real rate. Increases in our measure of risk appetite are followed by a boom in investment and output.