Asymmetries in risk premia, macroeconomic uncertainty and business cycles

Christoph Görtz and Mallory Yeromonahos

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

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)
Pages: 51 pages
Date: 2021-12
New Economics Papers: this item is included in nep-cwa, nep-dge, nep-mac, nep-ore and nep-upt
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cama.crawford.anu.edu.au/sites/default/fil ... rtz_yeromonahos0.pdf (application/pdf)

Related works:
Journal Article: Asymmetries in risk premia, macroeconomic uncertainty and business cycles (2022)
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:een:camaaa:2021-101

Access Statistics for this paper

More papers in CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University Contact information at EDIRC.
Bibliographic data for series maintained by Cama Admin ().