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News Shocks and Asset Prices

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  • Lorenzo Bretscher

    (London Business School)

  • Andrea Tamoni

    (London School of Economics)

  • Aytek Malkhozov

    (Federal Reserve Board)

Abstract

We examine the role of expectation, or news, shocks for the measurement of macroeconomic risk and the natural rate of interest. To this end, we estimate a New-Keynesian dynamic stochastic general equilibrium model that allows us to infer agents’ expectations about future fundamentals at different horizons. Accounting for news shocks results in better-specified macroeconomic risk factors that have significant explanatory power for the cross-section of stock and long-term bond returns. Further, anticipated changes in future productivity growth induce sizeable fluctuations in the natural rate of interest, which we show to have important implications for the conduct of monetary policy.

Suggested Citation

  • Lorenzo Bretscher & Andrea Tamoni & Aytek Malkhozov, 2019. "News Shocks and Asset Prices," 2019 Meeting Papers 100, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:100
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    1. Miranda-Agrippino, Silvia & Hacıoğlu Hoke, Sinem & Bluwstein, Kristina, 2020. "Patents, News, and Business Cycles," CEPR Discussion Papers 15062, C.E.P.R. Discussion Papers.
    2. Iskrev, Nikolay, 2019. "On the sources of information about latent variables in DSGE models," European Economic Review, Elsevier, vol. 119(C), pages 318-332.

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