Business-Cycle Variation in Macroeconomic Uncertainty and the Cross-Section of Expected Returns: Evidence for Scale-Dependent Risks
105 Pages Posted: 30 Sep 2015 Last revised: 10 Jun 2017
Date Written: April 12, 2017
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.
Keywords: macroeconomic uncertainty, scale-dependent risks, scale-specific predictability, monotonicity of factor loadings
JEL Classification: E32, E44, G12, C22
Suggested Citation: Suggested Citation