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The macroeconomic shock with the highest price of risk

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  • Pintor, Gabor

Abstract

There is a tight empirical link between the determinants of the cross-section of risk premia and selected structural shocks identified by macroeconomists. To show this, I propose an orthogonalisation method that approximates the stochastic discount factor with VAR innovations. When applying the method to the HML-SMBindustry portfolios, the obtained λ-shock closely resembles (up to 85% correlation) monetary policy and technology news shocks studied by macroeconomists. Results are similar for bond returns and across the US and UK.

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  • Pintor, Gabor, 2016. "The macroeconomic shock with the highest price of risk," LSE Research Online Documents on Economics 86225, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:86225
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    More about this item

    Keywords

    Stochastic Discount Factor; Vector Autoregression; Shocks; Technology News; Monetary Policy; Cross-section; Stock Returns; Bond Returns;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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