We examine the relation between real interest rate volatility and aggregate fluctuations for a diverse sample of countries. Compiling a new dataset including emerging and advanced countries, the substantial variation in our data yields novel results: (a) stochastic volatility outperforms Markov‐switching in representing interest rates, (b) some advanced economies can be more volatile than emerging markets, and (c) creditors take on more debt following volatility shocks. We show how an equilibrium business cycle model with uncertainty shocks can generate these facts. Sample heterogeneity produces significant parameter differences, playing an important role in distinguishing the effects of volatility shocks.

Using global data on aggregate stock markets, this paper finds that the capital asset pricing model fares much better than suggested previously. At shorter time horizons, our results also show that the positive risk-reward relation can collapse during times of high volatility. Compared to other countries, we retrieve evidence of lower systematic risks across frontier equity portfolios. We find that countries characterized by higher levels of openness, exchange rate volatility, and larger economic size are exposed to higher systematic covariances with the world stock market. Conversely, we obtain an inverse link between international reserves and systematic risks in national equity.