The Causal Impact of Macroeconomic Uncertainty on Expected Returns
100 Pages Posted: 2 Dec 2020 Last revised: 5 Jan 2022
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
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