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The Macroeconomic Shock with the Highest Price of Risk

Author

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  • Gabor Pinter

    (Bank of England)

Abstract

A single structural shock, that demands the highest possible risk premium in a standard macroeconomic VAR, explains more of the cross-section of stock returns than the 3-factor Fama-French model can. This shock is highly (>70%) correlated with technology news shocks studied by the macroeconomics literature. This is striking given that my identification strategy has nothing to do with the strategies used to identify news shocks, and my VAR does not even contain a measure of technology as an observable. My results provide strong independent support for the role of technology news shocks in explaining business cycles as well as the cross-sectional variation in stock returns. In addition, I highlight the empirical link between two largely unconnected literatures on consumption based asset pricing and on macroeconomic news shocks.

Suggested Citation

  • Gabor Pinter, 2016. "The Macroeconomic Shock with the Highest Price of Risk," Discussion Papers 1623, Centre for Macroeconomics (CFM), revised Apr 2017.
    • Handle: RePEc:cfm:wpaper:1623
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    2. Pinter, Gabor, 2018. "Macroeconomic shocks and risk premia," LSE Research Online Documents on Economics 90370, London School of Economics and Political Science, LSE Library.

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    More about this item

    Keywords

    Stock returns; VAR; Identification; Technology news shocks; Consumption based asset pricing;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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