Macroeconomic factors strike back: A Bayesian change-point model of time-varying risk exposures and premia in the U.S. cross-section

Daniele Bianchi, Massimo Guidolin and Francesco Ravazzolo

No 2013/19, Working Paper from Norges Bank

Abstract: This paper proposes a Bayesian estimation framework for a typical multi-factor model with time-varying risk exposures to macroeconomic risk factors and corresponding premia to price U.S. stocks and bonds. The model assumes that risk exposures and idiosynchratic volatility follow a break-point latent process, allowing for changes at any point in time but not restricting them to change at all points. An empirical application to 40 years of U.S. data and 23 portfolios shows that the approach yields sensible results compared to previous two-step methods based on naive recursive estimation schemes, as well as a set of alternative model restrictions. A variance decomposition test shows that although most of the predictable variation comes from the market risk premium, a number of additional macroeconomic risks, including real output and inflation shocks, are significantly priced in the cross-section. A Bayes factor analysis decisively favors the proposed change-point model.

Keywords: Change-point model; Stochastic volatility; Multi-factor linear models (search for similar items in EconPapers)
JEL-codes: C53 G11 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2013-08-22
New Economics Papers: this item is included in nep-ecm, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.norges-bank.no/en/news-events/news-pub ... pers/2013/WP-201319/

Related works:
Journal Article: Macroeconomic Factors Strike Back: A Bayesian Change-Point Model of Time-Varying Risk Exposures and Premia in the U.S. Cross-Section (2017)
Working Paper: Macroeconomic Factors Strike Back: A Bayesian Change-Point Model of Time-Varying Risk Exposures and Premia in the U.S. Cross-Section (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2013_19

Access Statistics for this paper

More papers in Working Paper from Norges Bank Contact information at EDIRC.
Bibliographic data for series maintained by ().