Asymmetries in risk premia, macroeconomic uncertainty and business cycles

Christoph Görtz and Mallory Yeromonahos

Journal of Economic Dynamics and Control, 2022, vol. 137, issue C

Abstract: A large literature suggests that the expected equity risk premium is countercyclical. Using a variety of different measures for this risk premium, we document that it also exhibits growth asymmetry, i.e. the risk premium rises sharply in recessions and declines much more gradually during the following recoveries. We show that a model with recursive preferences, in which agents cannot perfectly observe the state of current productivity, can generate the observed asymmetry in the risk premium. Key for this result are endogenous fluctuations in uncertainty which induce procyclical variations in agent’s nowcast accuracy. In addition to matching moments of the risk premium, the model is also successful in generating the growth asymmetry in macroeconomic aggregates observed in the data, and in matching the cyclical relation between quantities and the risk premium.

Keywords: Risk premium; Business cycles; Bayesian learning; Asymmetry; Uncertainty; Nowcasting (search for similar items in EconPapers)
JEL-codes: E2 E3 G1 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188922000355
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Asymmetries in risk premia, macroeconomic uncertainty and business cycles (2021)
Working Paper: Asymmetries in Risk Premia, Macroeconomic Uncertainty and Business Cycles (2021)
Working Paper: Asymmetries in Risk Premia, Macroeconomic Uncertainty and Business Cycles (2019)
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:eee:dyncon:v:137:y:2022:i:c:s0165188922000355

DOI: 10.1016/j.jedc.2022.104330

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().