Micro Uncertainty and Asset Prices

44 Pages Posted: 13 Aug 2018 Last revised: 17 Jun 2020

See all articles by Bernard Herskovic

Bernard Herskovic

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

Thilo Kind

London Business School

Howard Kung

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

Date Written: May 1, 2018

Abstract

At low frequencies, we document that size and value premia exhibit strong positive co-movement, but are both negatively related to the equity premium. These patterns are explained 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 relation between micro and macro uncertainty at low frequencies accounts for the negative relation of the market with size and value premia. The higher sensitivity of size-sorted portfolios to micro uncertainty can explain the observed instability of the size strategy.

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

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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