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Horizon-Specific Macroeconomic Risks and the Cross-Section of Expected ReturnsMartijn BoonsNew University of Lisbon - Nova School of Business and Economics Andrea TamoniLondon School of Economics & Political Science (LSE) December 15, 2015 Abstract: We show that decomposing macroeconomic risks across horizon is key to uncover a tight link between risk premia and the real economy. Exposure in four-year returns to innovations in macroeconomic growth and volatility with a matching half-life of over four years is priced in a wide variety of test assets. Shorter-term risks are not priced. Importantly, we show that long-term growth and volatility capture largely common risk. We then propose a single, long-term, macroeconomic risk factor which drives out standard long-run risk measures and performs similar to the Fama-French three-factor model in cross-sectional tests. Our empirical results strongly support the use of long-horizon betas to measure macroeconomic risks in asset returns.
Number of Pages in PDF File: 70 Keywords: Cross-sectional tests, firm-level stock returns, long horizons, macroeconomic risks, consumption, linear multifactor models JEL Classification: E32, E44, G12 Date posted: October 30, 2014 ; Last revised: April 14, 2016Suggested CitationContact Information
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