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

See all articles by Georgios Xyngis

Georgios Xyngis

Cardiff Business School, Cardiff University

Date Written: April 12, 2017

Abstract

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

Xyngis, Georgios, Business-Cycle Variation in Macroeconomic Uncertainty and the Cross-Section of Expected Returns: Evidence for Scale-Dependent Risks (April 12, 2017). Journal of Empirical Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2666252 or http://dx.doi.org/10.2139/ssrn.2666252

Georgios Xyngis (Contact Author)

Cardiff Business School, Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

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