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Hedging Macroeconomic and Financial Uncertainty and Volatility

Author

Listed:
  • Ian Dew-Becker
  • Stefano Giglio
  • Bryan T. Kelly

Abstract

We study the pricing of uncertainty shocks using a wide-ranging set of options that reveal premia for macroeconomic risks. Portfolios hedging macro uncertainty have historically earned zero or even significantly positive returns, while those exposed to the realization of large shocks have earned negative premia. The results are consistent with an important role for "good uncertainty". Options for nonfinancials are particularly important for spanning macro risks and good uncertainty. The results dictate the role of uncertainty and volatility in structural models and we show they are consistent with a simple extension of the long-run risk model.

Suggested Citation

  • Ian Dew-Becker & Stefano Giglio & Bryan T. Kelly, 2019. "Hedging Macroeconomic and Financial Uncertainty and Volatility," NBER Working Papers 26323, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26323
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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