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Is Economic Uncertainty a Valid Intertemporal CAPM State Variable?
[Basis assets]

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  • Qi Lin

Abstract

This paper evaluates whether economic uncertainty is consistent with the Merton (1973) intertemporal CAPM (ICAPM) theory. The economic uncertainty index of Jurado, Ludvigson and Ng (2015) consistently predicts a significant increase in stock market volatility. However, its innovation carries a statistically insignificant price of covariance risk in the cross-section, thereby failing to satisfy the Maio and Santa-Clara (2012) sign restrictions associated with the ICAPM. I also find robust evidence by using the level of the economic uncertainty index (JEL G10, G11, G12).Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Qi Lin, 2022. "Is Economic Uncertainty a Valid Intertemporal CAPM State Variable? [Basis assets]," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 12(4), pages 999-1040.
    • Handle: RePEc:oup:rasset:v:12:y:2022:i:4:p:999-1040.
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    File URL: http://hdl.handle.net/10.1093/rapstu/raac006
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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