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Expectations and aggregate risk

Lorenzo Bretscher, Aytek Malkhozov and Andrea Tamoni

Journal of Monetary Economics, 2021, vol. 123, issue C, 91-108

Abstract: We estimate agents’ expectations about future fundamentals using a dynamic stochastic general equilibrium model augmented with anticipated shocks. Accounting for agents’ expectations at the business cycle horizon results in aggregate risk factor innovations that have significant explanatory power for the cross section of stock and bond returns. Further, risk arising from macroeconomic fluctuations driven by expectation shocks is important to explain the value premium. Overall, expectations emerge as key to the link between financial markets and the real economy.

Keywords: News shocks; Consumption-CAPM; Cross section of asset returns (search for similar items in EconPapers)
JEL-codes: C63 E21 E32 G12 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jmoneco.2021.08.001

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