The macroeconomic shock with the highest price of risk

Gabor Pinter

No 616, Bank of England working papers from Bank of England

Abstract: I propose a new method of constructing a macroeconomic shock based on its ability to explain the cross-section of asset returns. The only identifying assumption is that this λ-shock demands the highest risk price per unit of exposure, or equivalently, minimises the associated sum of squared pricing errors, when pricing a given asset portfolio. When applying the method to the stock portfolios studied by Fama-French, a robust economic feature of the λ-shock is the delayed effect on aggregate quantities such as output and consumption and a sharp impact on the short-term interest rate and the term spread. The estimated λ-shock bears strong resemblance both with monetary policy shocks and with technology news shocks studied by the macroeconomic literature.

Keywords: Stock returns; VAR; identification; shocks; technology news; monetary policy (search for similar items in EconPapers)
JEL-codes: C32 G12 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2016-09-23
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: The Macroeconomic Shock with the Highest Price of Risk (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0616

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