Bridging Risk Perception and the Business Cycle

Abstract

This thesis examines the relationships between volatile stocks, risk perceptions, and the business cycle. We retrieve financial data on 572 firms listed on either the Oslo Stock Exchange or Nasdaq Stockholm. Additionally, we derive measures of risk perception and the real risk-free rate. The data collection and subsequent analysis cover the time period from January 2000 to December 2023. We use a novel measure of risk perception, the Price of Volatile Stocks, that explores the connection between financial markets and economic fluctuations. Moreover, we review empirical evidence for the Price of Volatile Stocks and evaluate its validity for the Norwegian and Swedish economies through three hypotheses. In our analysis, we find inconclusive evidence that the Price of Volatile Stocks can serve as a metric that bridges risk perceptions and the business cycles in scope. We find statistically significant correlations between this novel measure and business outlook indices. However, due to varying results and limited robustness in the statistically significant findings, we do not observe strong evidence to support the hypotheses. In our research, we closely follow the methodology of a corresponding study for the US economy. We compare our findings against this study and evaluate the deviations accordingly. Our thesis is meant to add to the large body of literature on the risk-centric view of business cycles and encourages further research in this field.