The macroeconomic shock with the highest price of risk

Gabor Pintor

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: There is a tight empirical link between the determinants of the cross-section of risk premia and selected structural shocks identified by macroeconomists. To show this, I propose an orthogonalisation method that approximates the stochastic discount factor with VAR innovations. When applying the method to the HML-SMBindustry portfolios, the obtained λ-shock closely resembles (up to 85% correlation) monetary policy and technology news shocks studied by macroeconomists. Results are similar for bond returns and across the US and UK.

Keywords: Stochastic Discount Factor; Vector Autoregression; Shocks; Technology News; Monetary Policy; Cross-section; Stock Returns; Bond Returns (search for similar items in EconPapers)
JEL-codes: C32 G12 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2016-04-04
New Economics Papers: this item is included in nep-mac
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