News Shocks and Asset Prices

60 Pages Posted: 14 Dec 2013 Last revised: 3 Apr 2019

See all articles by Lorenzo Bretscher

Lorenzo Bretscher

London Business School - Department of Finance; affiliation not provided to SSRN

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; London School of Economics & Political Science (LSE)

Date Written: March 28, 2019

Abstract

We examine the role of expectation, or news, shocks for the measurement of macroeconomic risk and the natural rate of interest. To this end, we estimate a New-Keynesian dynamic stochastic general equilibrium model that allows us to infer agents' expectations about future fundamentals at different horizons. Accounting for news shocks results in better-specified macroeconomic risk factors that have significant explanatory power for the cross-section of stock and long-term bond returns. Further, anticipated changes in future productivity growth induce sizable fluctuations in the natural rate of interest, which we show to have important implications for the conduct of monetary policy.

Keywords: Anticipated Shocks, Asset Prices, Monetary Policy, Consumption-CAPM, Recursive Preferences, DSGE Model

JEL Classification: C22, E32, E44, G12, G17

Suggested Citation

Bretscher, Lorenzo and Malkhozov, Aytek and Tamoni, Andrea, News Shocks and Asset Prices (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

affiliation not provided to SSRN

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

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom
02079557303 (Phone)

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