Precautionary Savings in Stocks and Bonds

Abstract

We document a strong and robust relation between the one-year real rate and precautionary savings motives, as measured by the stock market. Our novel proxy for precautionary savings, based on the difference in valuations between low-and highvolatility stocks, explains 37% of variation in the real rate. In addition, the real rate forecasts returns on the low-minus-high volatility portfolio, though it appears unrelated with 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. We rationalize these findings in a stylized model with segmented investor clienteles and habit formation.⇤ We thank Hanno Lustig and seminar participants at the University of British Columbia for helpful comments. Pflueger gratefully acknowledges funding from the Social Sciences and Humanities Research Council of Canada (grant number 430-2014-00796). The Online Appendix to the paper can be found here and the Data Appendix can be found here.