The macroeconomic shock with the highest price of risk

There is a tight empirical link between the determinants of the cross-section of risk premia and selected structural shocks identified by macroeconomists. To show this, I propose an orthogonalisation method that approximates the stochastic discount factor with VAR innovations. When applying the method to the HML-SMBindustry portfolios, the obtained λ-shock closely resembles (up to 85% correlation) monetary policy and technology news shocks studied by macroeconomists. Results are similar for bond returns and across the US and UK.