Asymmetries in Risk Premia, Macroeconomic Uncertainty and Business Cycles

46 Pages Posted: 6 Dec 2019

See all articles by Christoph Görtz

Christoph Görtz

University of Birmingham - Department of Economics

Mallory Yeromonahos

University of Birmingham - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: 2019

Abstract

A large literature suggests that the expected equity risk premium is countercyclical. Using a variety of different measures for this risk premium, we document that it also exhibits growth asymmetry, i.e. the risk premium rises sharply in recessions and declines much more gradually during the following recoveries. We show that a model with recursive preferences, in which agents cannot perfectly observe the state of current productivity, can generate the observed asymmetry in the risk premium. Key for this result are endogenous fluctuations in uncertainty which induce procyclical variations in agent's nowcast accuracy. In addition to matching moments of the risk premium, the model is also successful in generating the growth asymmetry in macroeconomic aggregates observed in the data, and in matching the cyclical relation between quantities and the risk premium.

Keywords: risk premium, business cycles, Bayesian learning, asymmetry, uncertainty, nowcasting

JEL Classification: E200, E300, G100

Suggested Citation

Görtz, Christoph and Yeromonahos, Mallory, Asymmetries in Risk Premia, Macroeconomic Uncertainty and Business Cycles (2019). CESifo Working Paper No. 7959, Available at SSRN: https://ssrn.com/abstract=3498715 or http://dx.doi.org/10.2139/ssrn.3498715

Christoph Görtz (Contact Author)

University of Birmingham - Department of Economics ( email )

United Kingdom

Mallory Yeromonahos

University of Birmingham - Department of Economics ( email )

United Kingdom

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