Finance Papers

Document Type

Journal Article

Date of this Version

8-2015

Publication Source

Journal of Financial Economics

Volume

117

Issue

2

Start Page

369

Last Page

397

DOI

10.1016/j.jfineco.2015.05.004

Abstract

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.

Copyright/Permission Statement

© 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/

Keywords

uncertainty, economic growth, asset prices, recursive utility

Embargo Date

5-28-2018

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Date Posted: 27 November 2017

This document has been peer reviewed.