Interpreting volatility shocks as preference shocks

- This paper provides an intuitive interpretation of volatility shocks.
- An analytically tractable model of volatility shocks is presented.
- A rise in volatility acts as a properly defined negative preference shock.

This paper examines the relationship between volatility shocks and preference shocks in an analytically tractable endogenous growth model with recursive preferences and stochastic volatility. I show that there exists an explicit mapping between volatility shocks and preference shocks, and a rise in volatility generates the same impulse responses of macroeconomic aggregates as a negative preference shock.