Recent Developments in Financial Risk and the Real Economy

This paper reviews recent developments in macro and finance on the relationship between financial risk and the real economy. We focus on three specific topics: the term structure of uncertainty, time variation - and specifically the long-term decline - in the variance risk premium, and time variation in conditional skewness. We also introduce two new data series: implied volatility from one-day options on grains for the period 1906-1936, and on cliquet options, which provide insurance against single-day crashes on the S&P 500, both of which give some context to the recent rise in trade in extremely short-dated options. Finally, we discuss new avenues for future research.