Macroeconomic Risks and Asset Pricing: Evidence from a Dynamic Stochastic General Equilibrium Model

Erica X. N. Li (), Haitao Li (), Shujing Wang () and Shujing Wang ()
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Erica X. N. Li: Department of Finance, Cheung Kong Graduate School of Business, 100738 Beijing, China
Haitao Li: Department of Finance, Cheung Kong Graduate School of Business, 100738 Beijing, China
Shujing Wang: Department of Economics and Finance, School of Economics and Management, Tongji University, 200092 Shanghai, China
Shujing Wang: Department of Statistics, Iowa State University, Ames, Iowa 50011

Management Science, 2019, vol. 65, issue 8, 3585-3604

Abstract: We study the relation between macroeconomic fundamentals and asset pricing through the lens of a dynamic stochastic general equilibrium (DSGE) model. We provide full-information Bayesian estimation of the DSGE model using macroeconomic variables and extract the time series of four latent fundamental shocks of the model: neutral technology shock, investment-specific technological shock, monetary policy shock, and risk shock. Asset pricing tests show that our model-implied four-factor model can explain a number of prominent cross-sectional return spreads: size, book-to-market, investment, earnings, and long-term reversal. The investment-specific technological shock and risk shock play the most important role in explaining those return spreads.

Keywords: DSGE model; Bayesian MCMC estimation; stock returns; neutral technology shock; investment-specific technology shock; monetary policy shock; risk shock (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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