Macroeconomic Risks and Asset Pricing: Evidence from a Dynamic Stochastic General Equilibrium Model

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Date: Aug. 2019
From: Management Science(Vol. 65, Issue 8)
Publisher: Institute for Operations Research and the Management Sciences
Document Type: Report
Length: 13,849 words
Lexile Measure: 1510L

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Abstract :

We study the relation between macroeconomic fundamentals and asset pricing through the lens of a dynamic stochastic general equilibrium (DSGE) model. We provide full-information Bayesian estimation of the DSGE model using macroeconomic variables and extract the time series of four latent fundamental shocks of the model: neutral technology shock, investment-specific technological shock, monetary policy shock, and risk shock. Asset pricing tests show that our model-implied four-factor model can explain a number of prominent cross-sectional return spreads: size, book-to-market, investment, earnings, and long-term reversal. The investment-specific technological shock and risk shock play the most important role in explaining those return spreads. History: Accepted by Neng Wang, finance. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2017.2999. Keywords: DSGE model * Bayesian MCMC estimation * stock returns * neutral technology shock * investment-specific technology shock monetary policy shock * risk shock

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Gale Document Number: GALE|A598581579