Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153471
Authors: 
Bekaert, Geert
Hoerova, Marie
Scheicher, Martin
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1037
Abstract: 
Implied volatility indices should have information about risk parameters, once they are cleansed of the influence of normal volatility dynamics and macro-economic uncertainty. Building on intuition from the dynamic asset pricing literature, we uncover unobserved risk aversion and fundamental uncertainty from the observed time series of the VIX and the credit spreads while controlling for realized volatility, expectations about the macroeconomic outlook, and interest rates. We apply this methodology to monthly data from both Germany and the US. We find that implied volatilities contain a substantial amount of information regarding risk aversion whereas credit spreads have a lot to say about both risk aversion and uncertainty. Moreover, there is a significant comovement in the German and US risk aversion.
Subjects: 
Credit Spread
Economic uncertainty
risk aversion
Time variation in risk and return
Volatility dynamics
Document Type: 
Working Paper

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