Horizon-Specific Macroeconomic Risks and the Cross-Section of Expected Returns

70 Pages Posted: 30 Oct 2014 Last revised: 14 Apr 2016

Martijn Boons

New University of Lisbon - Nova School of Business and Economics

Andrea Tamoni

London School of Economics & Political Science (LSE)

Date Written: 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.

Keywords: Cross-sectional tests, firm-level stock returns, long horizons, macroeconomic risks, consumption, linear multifactor models

JEL Classification: E32, E44, G12

Suggested Citation

Boons, Martijn and Tamoni, Andrea, Horizon-Specific Macroeconomic Risks and the Cross-Section of Expected Returns (December 15, 2015). Available at SSRN: https://ssrn.com/abstract=2516251 or http://dx.doi.org/10.2139/ssrn.2516251

Martijn Boons (Contact Author)

New University of Lisbon - Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Andrea Tamoni

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

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

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