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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
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
0927-5398
43-65

(2017) Business-cycle variation in macroeconomic uncertainty and the cross-section of expected returns: Evidence for scale-dependent risks. Journal of Empirical Finance, 44, 43-65. (doi:10.1016/j.jempfin.2017.06.001).

Record type: Article

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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More information

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: https://eprints.soton.ac.uk/id/eprint/417204
ISSN: 0927-5398
PURE UUID: 054cc168-5b4d-4c6d-94ea-8fb5a840d7af

Catalogue record

Date deposited: 25 Jan 2018 17:30
Last modified: 25 Jan 2018 17:30

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