Volatility and measures of expected volatility derived from options prices vary over time but not in ways that are easy to link to economic fundamentals or to the variation of expected returns in asset markets. Moreover, the relationship between financial market volatility and the volatility of macroeconomic variables such as GDP is not well understood.
A fourth puzzle related to the pricing of risk concerns the term premium, which is the additional compensation that investors require to hold longer-term securities. We estimate from the Treasury market that the term premium has declined substantially in recent years to unusually low levels, which has contributed to the inversion of the yield curve.