Macroeconomic Expectations and State-Dependent Factor Returns

We examine the asymmetric impact of macroeconomic expectations and their associated dispersion on equity risk premia across different market regimes. First, we employ a two-state logit mixture vector autoregressive model and use Consensus Economics survey data on GDP growth, inflation, and short-term interest rates to proxy macroeconomic expectations and disagreement in the United States over the period 1989M10-2022M09. We show that unexpected changes in survey forecasts and their dispersion significantly affect cyclical factor returns in a state-dependent dynamic setting. Moreover, we demonstrate that the state of the economy matters for both the magnitude and persistence of these effects. Second, we employ the dynamic asset pricing model of Adrian et al. (2015) to show that macroeconomic forecasts and their dispersion act as important drivers of the price of risk. We also document that a survey-expectations-augmented specification reduces pricing and risk premium errors relative to a standard benchmark set of return predictors.