News, Beliefs, and Aggregate Risk

62 Pages Posted: 14 Dec 2013 Last revised: 16 Oct 2019

See all articles by Lorenzo Bretscher

Lorenzo Bretscher

London Business School - Department of Finance

Aytek Malkhozov

Board of Governors of the Federal Reserve System

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: March 28, 2019

Abstract

We examine the role of agents’ expectations about future economic fundamentals for the identification of aggregate risk. To this end, we estimate a New-Keynesian general equilibrium model augmented with expectation, or news, shocks. Accounting for agents’ expectations at the business cycle horizon results in aggregate risk factor innovations that have significant explanatory power for the cross section of stock and bond returns. In particular, news offer a novel explanation for the value premium consistent with the role of the market-to-value component of the value strategy returns. Moreover, news are important to price cash-flow duration sorted portfolios.

Keywords: News Shocks, Consumption-CAPM, Cross Section of Returns, Market-to-Book Decomposition

JEL Classification: G12, E32, E21, C63

Suggested Citation

Bretscher, Lorenzo and Malkhozov, Aytek and Tamoni, Andrea, News, Beliefs, and Aggregate Risk (March 28, 2019). Available at SSRN: https://ssrn.com/abstract=2367196 or http://dx.doi.org/10.2139/ssrn.2367196

Lorenzo Bretscher

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Aytek Malkhozov

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andrea Tamoni (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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