Pflueger, Carolin. <br/><br/>
Financial Market Risk Perceptions and the Macroeconomy / 
Carolin Pflueger, Emil Siriwardane, Adi Sunderam. 
 - Cambridge, Mass.  National Bureau of Economic Research  2019. 
 - 1 online resource:  illustrations (black and white); 
 - NBER working paper series  no. w26290 .
 - Working Paper Series (National Bureau of Economic Research)  no. w26290. .
<br/><br/> September 2019. 
<br/><br/> We propose a novel measure of risk perceptions: the price of volatile stocks (PVS<sub>t</sub>), defined as the book-to-market ratio of low-volatility stocks minus the book-to-market ratio of high-volatility stocks. PVS<sub>t</sub> is high when perceived risk directly measured from surveys and option prices is low. When perceived risk is high according to our measure, safe asset prices are high, risky asset prices are low, the cost of capital for risky firms is high, and real investment is forecast to decline. Perceived risk as measured by PVS<sub>t</sub> falls after positive macroeconomic news. These declines are predictably followed by upward revisions in investor risk perceptions. Our results suggest that risk perceptions embedded in stock prices are an important driver of the business cycle and are not fully rational. 
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