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Macroeconomic shocks and risk premia

Pinter, Gabor (2018) Macroeconomic shocks and risk premia. CFM Discussion Paper Series (CFM-DP2018-12). Centre For Macroeconomics, London School of Economics and Political Science, London, UK.

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Abstract

What are the macroeconomic forces behind the cross-sectional and time-series variation in expected excess returns? To answer this question, this paper integrates models of empirical asset pricing with structural vector autoregressions (VAR). First, I use an unconditional asset pricing framework to construct an orthogonal shock in a macroeconomic VAR that best explains the cross-sectional variation in expected returns. The obtained “λ-shock” closely resembles identified monetary policy surprises and does not explain the recent US recessions. Second, I integrate return-forecasting methods to construct a second shock in the VAR, which best explains time-variation in expected returns. The obtained “γ-shock” turns out to be virtually orthogonal to the λ-shock, closely resembles demand-type financial shocks identified by macroeconomists, and explains most US recessions. I find that the λ-shock and the γ-shock jointly explain up to 80% of aggregate consumption fluctuations in the US.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.centreformacroeconomics.ac.uk/Home.aspx
Additional Information: © 2018 Centre for Macroeconomics
Divisions: Centre for Macroeconomics
Subjects: H Social Sciences > HB Economic Theory
JEL classification: C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C32 - Time-Series Models
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Sets: Research centres and groups > Centre for Macroeconomics
Date Deposited: 05 Oct 2018 14:24
Last Modified: 30 Jul 2020 23:09
URI: http://eprints.lse.ac.uk/id/eprint/90370

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