Nicholas Vause and Carolin Pflueger
Recently, Pflueger, Siriwardane and Sunderam (2020) proposed a new measure of investor risk perceptions based on the cross-section of stock prices. Using that measure, they found that when risk perceptions are high, the cost of capital of risky firms is high and subsequently real investment and employment decline in the United States. In this post, we show that similar relationships exist in the United Kingdom. In 2023 Q1, the UK measure fell to its lowest level since the outbreak of the Covid pandemic, indicating higher risk perceptions and potentially foreshadowing weaker economic activity. This indicator may be helpful for policymakers, as it could serve as a useful measure of risk perceptions relevant for future economic developments and monetary policy.
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