Micro Uncertainty and Asset Prices

52 Pages Posted: 13 Aug 2018 Last revised: 29 Dec 2022

See all articles by Bernard Herskovic

Bernard Herskovic

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Thilo Kind

London Business School

Howard Kung

London Business School; Centre for Economic Policy Research (CEPR)

Date Written: May 1, 2018

Abstract

Size and value premia comove strongly with one another at low frequencies, but they are both negatively related to long-run movements in the equity premium. We explain these patterns in an investment-based asset pricing model featuring persistent micro and macro uncertainty. Micro uncertainty generates size and value premia waves, while macroeconomic uncertainty produces equity premium waves. The negative correlation between micro and macro uncertainty at low frequencies explains why the equity premium is a long-term hedge for size and value premia. Persistent micro uncertainty is also a source of instability for size and value factors in short samples.

Keywords: Production-based asset pricing, Neoclassical Investment, Long-run risks, Cross-section of returns, Micro uncertainty, TFP

Suggested Citation

Herskovic, Bernard and Kind, Thilo and Kung, Howard, Micro Uncertainty and Asset Prices (May 1, 2018). Available at SSRN: https://ssrn.com/abstract=3220825 or http://dx.doi.org/10.2139/ssrn.3220825

Bernard Herskovic

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

Los Angeles, CA 90095-1481
United States

HOME PAGE: http://bernardherskovic.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Thilo Kind

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Howard Kung (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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