Identification of Non-Rational Risk Shocks

Maximilian Böck

Publication: Working/Discussion PaperWU Working Paper

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Abstract

This paper studies how non-rational risk shocks affect the macroeconomy. Using a novel identification design which exploits survey data on expectations of financial executives in the US, I identify non-rational risk shocks via distortions in beliefs. Belief distortions are measured through surprises in beliefs of credit spreads, defined as the difference between subjective and objective forecasts. They are then used as a proxy for exogenous variation in the risk premium. Belief distortions elicit due to overreaction of credit spreads, eventually leading to exaggerated beliefs on financial markets. Results indicate that the constructed shocks have statistically and economically meaningful effects. This has sizeable consequences for the U.S. economy: A positive non-rational risk shock moves credit spreads remarkably while real activity and the stock market decline.
Original languageEnglish
Number of pages59
DOIs
Publication statusPublished - 2021

Publication series

SeriesDepartment of Economics Working Paper Series
Number314

Austrian Classification of Fields of Science and Technology (ÖFOS)

  • 502025 Econometrics
  • 502018 Macroeconomics

WU Working Paper Series

  • Department of Economics Working Paper Series

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