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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Erica X. N. Li & Haitao Li & Shujing Wang & Shujing Wang, 2019. "Macroeconomic Risks and Asset Pricing: Evidence from a Dynamic Stochastic General Equilibrium Model," Management Science, INFORMS, vol. 65(8), pages 3585-3604, August.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:8:p:3585-3604
    DOI: 10.1287/mnsc.2017.2999
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    2. Liu, Clark & Wang, Shujing & Wei, K.C. John, 2021. "Demand shock, speculative beta, and asset prices: Evidence from the Shanghai-Hong Kong Stock Connect program," Journal of Banking & Finance, Elsevier, vol. 126(C).

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