Date of this Version
Journal of Financial Economics
Does macroeconomic uncertainty increase or decrease aggregate growth and asset prices? To address this question, we decompose aggregate uncertainty into ‘good’ and ‘bad’ volatility components, associated with positive and negative innovations to macroeconomic growth. We document that in line with our theoretical framework, these two uncertainties have opposite impact on aggregate growth and asset prices. Good uncertainty predicts an increase in future economic activity, such as consumption, output, and investment, and is positively related to valuation ratios, while bad uncertainty forecasts a decline in economic growth and depresses asset prices. Further, the market price of risk and equity beta of good uncertainty are positive, while negative for bad uncertainty. Hence, both uncertainty risks contribute positively to risk premia, and help explain the cross-section of expected returns beyond cash flow risk.
© 2015. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
uncertainty, economic growth, asset prices, recursive utility
Segal, G., Shaliastovich, I., & Yaron, A. (2015). Good and Bad Uncertainty: Macroeconomic and Financial Market Implications. Journal of Financial Economics, 117 (2), 369-397. http://dx.doi.org/10.1016/j.jfineco.2015.05.004
Date Posted: 27 November 2017
This document has been peer reviewed.