The macroeconomic shock with the highest price of risk
Pintor, G.
(2016).
The macroeconomic shock with the highest price of risk.
(CFM discussion paper series CFM-DP2016-23).
Centre For Macroeconomics.
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.
| Item Type | Working paper |
|---|---|
| Copyright holders | © 2016 The Authors |
| Departments | LSE > Research Centres > Centre for Macroeconomics |
| Date Deposited | 12 Dec 2017 |
| URI | https://researchonline.lse.ac.uk/id/eprint/86225 |