Do precautionary savings drive the real interest rate? Evidence from the stock market
Carolin Pflueger, Assistant Professor, Finance Division, UBC Sauder
Please join us for our upcoming finance seminar. Carolin Pflueger, Assistant Professor, Finance Divison, UBC Sauder will be presenting.
University of Oxford staff and students are welcome to attend if seats are available. If you would like to attend please contact Marie van Boekel to check availability.
We document a strong and robust relationship between the one-year real rate and the valuation of high-volatility stocks, which we argue measures precautionary savings motives. Our novel proxy for precautionary savings explains 44% of the variation in the real rate. In addition, the real rate forecasts returns on the low-minus-high volatility portfolio but appears unrelated to observable measures of the quantity of risk. Our results suggest that precautionary savings motives, and thus the real rate, are driven by time-varying attitudes towards risk. These findings are difficult to rationalize in models with perfect risk sharing and highlight the role that imperfect diversification plays in determining interest rates.