Does Cross-Sectional Asset Pricing Matter for the Macroeconomy?

42 Pages Posted: 30 Nov 2023

See all articles by Roy Chen-Zhang

Roy Chen-Zhang

University of North Carolina (UNC) at Chapel Hill

Gill Segal

University of North Carolina (UNC) at Chapel Hill - Finance Area

Date Written: November 17, 2023

Abstract

Yes. The quantity of risk underlying cross-sectional return spreads is time-varying, yielding swings in factors' risk premia. We define ``macro-relevant'' factors as those whose risk premium variation induce consumption fluctuations, and more broadly, a business-cycle. While most factors documented in the literature are vetted in this manner, a handful of factors' risk matter for economic growth, above and beyond changes in market risk. We cluster macro-relevant factors based on their impact in frequency domains. Macro-relevant factors mostly relate to profitability, organization capital, financial conditions, or inventory. Interestingly, many factors' risk premia are associated with expansions, unlike the market risk premium.

Keywords: Risk Premium, Asset Pricing, Factor Zoo, Economic Growth, Macro-Finance

JEL Classification: G12

Suggested Citation

Chen-Zhang, Roy and Segal, Gill, Does Cross-Sectional Asset Pricing Matter for the Macroeconomy? (November 17, 2023). Available at SSRN: https://ssrn.com/abstract=4636589 or http://dx.doi.org/10.2139/ssrn.4636589

Roy Chen-Zhang

University of North Carolina (UNC) at Chapel Hill ( email )

Chapel Hill, NC 27599
United States

Gill Segal (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

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