The Causal Impact of Macroeconomic Uncertainty on Expected Returns

100 Pages Posted: 2 Dec 2020 Last revised: 5 Jan 2022

See all articles by Aditya Chaudhry

Aditya Chaudhry

Ohio State University - Fisher College of Business

Date Written: August 27, 2020

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

Suggested Citation

Chaudhry, Aditya, The Causal Impact of Macroeconomic Uncertainty on Expected Returns (August 27, 2020). Available at SSRN: https://ssrn.com/abstract=3711584 or http://dx.doi.org/10.2139/ssrn.3711584

Aditya Chaudhry (Contact Author)

Ohio State University - Fisher College of Business ( email )

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Building 249
Columbus, OH 43210
United States

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