The Causal Impact of Macroeconomic Uncertainty on Expected Returns

Abstract

I quantify the causal impact of macroeconomic uncertainty on expected returns. The exogenous timing of macroeconomic announcements provides an instrument for uncertainty. Using realized returns and daily measures of macroeconomic uncertainty, I find announcements resolve uncertainty, which causes expected returns to fall. Under weak assumptions, macroeconomic uncertainty explains at most 32% of expected return variation. Under the additional, empirically justified assumption that other expected return drivers do not correlate with announcement timing, macroeconomic uncertainty explains 10% of expected return variation and a one standard deviation increase in macroeconomic uncertainty raises long-run expected returns by 173 basis points.

Keywords: Macroeconomic Uncertainty, Asset Pricing, High-Frequency Identification

JEL Classification: G10, G12, E44