The Macroeconomic Shock with the Highest Price of Risk
No 1623, Discussion Papers from Centre for Macroeconomics (CFM)
A single structural shock, that demands the highest possible risk premium in a standard macroeconomic VAR, explains more of the cross-section of stock returns than the 3-factor Fama-French model can. This shock is highly (>70%) correlated with technology news shocks studied by the macroeconomics literature. This is striking given that my identification strategy has nothing to do with the strategies used to identify news shocks, and my VAR does not even contain a measure of technology as an observable. My results provide strong independent support for the role of technology news shocks in explaining business cycles as well as the cross-sectional variation in stock returns. In addition, I highlight the empirical link between two largely unconnected literatures on consumption based asset pricing and on macroeconomic news shocks.
Keywords: Stock returns; VAR; Identification; Technology news shocks; Consumption based asset pricing (search for similar items in EconPapers)
JEL-codes: C32 G12 (search for similar items in EconPapers)
Date: 2016-08, Revised 2017-04
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Working Paper: The macroeconomic shock with the highest price of risk (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:1623
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