Hedging Macroeconomic and Financial Uncertainty and Volatility

62 Pages Posted: 9 Dec 2018 Last revised: 2 Aug 2019

See all articles by Ian Dew-Becker

Ian Dew-Becker

Kellogg School of Management - Department of Finance

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Bryan T. Kelly

Yale SOM; AQR Capital Management, LLC; National Bureau of Economic Research (NBER)

Date Written: April 1, 2019

Abstract

We study the pricing of shocks to uncertainty and volatility using a novel and wide-ranging set of options contracts. If uncertainty shocks are viewed as bad by investors, portfolios that hedge them should earn negative premia. Empirically, however, such portfolios have historically earned significantly positive returns. Instead, it is portfolios exposed to the realization of large shocks to fundamentals that have historically earned negative premia. These results imply that it is large realizations of shocks to fundamentals, not forward-looking uncertainty shocks, that drive investors’ marginal utility; in turn, these implications dictate the role of volatility in macroeconomic models.

Suggested Citation

Dew-Becker, Ian and Giglio, Stefano and Kelly, Bryan T., Hedging Macroeconomic and Financial Uncertainty and Volatility (April 1, 2019). Yale ICF Working Paper No. 2018-21. Available at SSRN: https://ssrn.com/abstract=3284790 or http://dx.doi.org/10.2139/ssrn.3284790

Ian Dew-Becker

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

Stefano Giglio

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Bryan T. Kelly (Contact Author)

Yale SOM ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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