Business-cycle variation in macroeconomic uncertainty and the cross-section of expected returns: Evidence for scale-dependent risks
Business-cycle variation in macroeconomic uncertainty and the cross-section of expected returns: Evidence for scale-dependent risks
A single factor that captures assets’ exposure to business-cycle variation in macroeconomic uncertainty can explain the level and cross-sectional differences of asset returns. Specifically, based on portfolio-level tests I demonstrate that fluctuations in uncertainty with persistence ranging from 32 to 128 months carry a negative price of risk of about −2% annually. The price of risk for fluctuations with persistence outside of this range and for the raw series of aggregate uncertainty is insignificant. Also, equity exposures are negative and hence the corresponding risk premia are positive. I quantify macroeconomic uncertainty using the model-free index of Jurado et al. (2015) derived from monthly, quarterly and annual forecasts.
Macroeconomic uncertainty, Monotonicity of factor loadings, Scale-dependent risks, Scale-specific predictability
43-65
1 December 2017
Xyngis, Georgios
(2017)
Business-cycle variation in macroeconomic uncertainty and the cross-section of expected returns: Evidence for scale-dependent risks.
Journal of Empirical Finance, 44, .
(doi:10.1016/j.jempfin.2017.06.001).
Abstract
A single factor that captures assets’ exposure to business-cycle variation in macroeconomic uncertainty can explain the level and cross-sectional differences of asset returns. Specifically, based on portfolio-level tests I demonstrate that fluctuations in uncertainty with persistence ranging from 32 to 128 months carry a negative price of risk of about −2% annually. The price of risk for fluctuations with persistence outside of this range and for the raw series of aggregate uncertainty is insignificant. Also, equity exposures are negative and hence the corresponding risk premia are positive. I quantify macroeconomic uncertainty using the model-free index of Jurado et al. (2015) derived from monthly, quarterly and annual forecasts.
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e-pub ahead of print date: 22 June 2017
Published date: 1 December 2017
Keywords:
Macroeconomic uncertainty, Monotonicity of factor loadings, Scale-dependent risks, Scale-specific predictability
Identifiers
Local EPrints ID: 417204
URI: http://eprints.soton.ac.uk/id/eprint/417204
ISSN: 0927-5398
PURE UUID: 054cc168-5b4d-4c6d-94ea-8fb5a840d7af
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Date deposited: 25 Jan 2018 17:30
Last modified: 15 Mar 2024 18:05
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Author:
Georgios Xyngis
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