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Market Risk Factors

Paper Session

Friday, Jan. 7, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: American Finance Association
  • Chair: Hanno Nico Lustig, Stanford University

The Causal Impact of Macroeconomic Uncertainty on Expected Returns

Aditya Chaudhry
,
University of Chicago

Abstract

I quantify the causal impact of macroeconomic uncertainty on expected returns. The exogenous timing of macroeconomic announcements provides an instrument for uncertainty. Using realized returns and daily measures of macroeconomic uncertainty, I find announcements resolve uncertainty, which causes expected returns to fall. Under weak assumptions, macroeconomic uncertainty explains at most 32% of expected return variation. Under the additional, empirically justified assumption that other expected return drivers do not correlate with announcement timing, macroeconomic uncertainty explains 10% of expected return variation and a one standard deviation increase in macroeconomic uncertainty raises long-run expected returns by 173 basis points.

Duration-Based Stock Valuation: Reassessing Stock Market Performance and Volatility

Jules van Binsbergen
,
University of Pennsylvania

Abstract

Using a panel of international government bond data, I construct fixed income portfolios that match the duration of the dividend strips of the local aggregate stock market index. I find that these bond portfolios have performed as well as their stock counterparts in the past half century while exhibiting similar (or even higher) levels of volatility. These results provide a novel perspective on both the equity risk premium and excess volatility puzzles (bubbles). I present several potential explanations, and discuss further the implications for macroeconomics, monetary economics, asset pricing, and corporate finance. The results can not be explained by net stock repurchases.

More than 100% of the Equity Premium: How Much Is Really Earned on Macroeconomic Announcement Days?

Rory Ernst
,
University of Washington
Thomas Gilbert
,
University of Washington
Christopher Hrdlicka
,
University of Washington

Abstract

One can earn well over 100% of the equity premium on macroeconomic announcement days identified by the prior literature. Inadvertent sample selection combined with announcements clustering at times of known seasonalities produce this too-much-return puzzle. Including all monthly announcement series eliminates this sample selection bias. Day-of-the-month fixed effects control for the announcement clustering. Macroeconomic announcements as a whole are responsible for about half of the equity premium. This smaller premium earned over more days means Sharpe ratios are similar on announcement and non-announcement days. Simulations show the observed concentrations of the equity premium in a few announcement series, e.g., FOMC, ex-post is likely even when those series are ex-ante identical to all others. A higher CAPM slope on macroeconomic announcement days is not evidence that those days are special. It is a mechanical result of high ex-post market returns.

Discussant(s)
Francois Gourio
,
Federal Reserve Bank of Chicago
Niels Gormsen
,
University of Chicago
Valentin Haddad
,
University of California-Los Angeles
JEL Classifications
  • G0 - General