Macroeconomic Risks and Asset Pricing: Evidence from a Dynamic Stochastic General Equilibrium Model
47 Pages Posted: 8 Jun 2017 Last revised: 26 Jan 2018
Date Written: June 6, 2017
We study the relation between macroeconomic fundamentals and asset pricing through the lens of a dynamic stochastic general equilibrium (DSGE) model. We provide full-information Bayesian estimation of the DSGE model using macroeconomic variables and extract the time-series of four latent fundamental shocks of the model: neutral technology shock, investment-specific technological shock, monetary policy shock, and risk shock. Asset pricing tests show that our model-implied four-factor model can explain a number of prominent cross-sectional return spreads: size, book-to-market, investment, earnings, and long-term reversal. The investment-specific technological shock and risk shock play the most important role in explaining those return spreads.
Keywords: DSGE model, Bayesian MCMC estimation, stock returns, neutral technology shock, investment-specific technology shock, monetary policy shock, risk shock
JEL Classification: C11, C13, E44
Suggested Citation: Suggested Citation