Working Paper: NBER ID: w18128
Authors: Emi Nakamura; Dmitriy Sergeyev; J. N. Steinsson
Abstract: We provide new estimates of the importance of growth rate and uncertainty shocks for developed countries. The shocks we estimate are large and correspond to well-known macroeconomic episodes such as the Great Moderation and the productivity slowdown. We compare our results to earlier estimates of “long-run risks” and assess the implications for asset pricing. Our estimates yield greater return predictability and a more volatile price-dividend ratio. In addition, we can explain a substantial fraction of cross-country variation in the equity premium. An advantage of our approach, based on macroeconomic data alone, is that the parameter estimates cannot be viewed as backward engineered to fit asset pricing data. We provide intuition for our results using the recently developed framework of shock-exposure and shock-price elasticities.
Keywords: Consumption; Growth Rate; Uncertainty Shocks; Asset Pricing; Equity Premium
JEL Codes: E21; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| growth rate shocks (O49) | consumption growth (E20) |
| growth rate shocks (O49) | volatility shocks (E32) |
| volatility shocks (E32) | consumption growth (E20) |
| growth rate shocks (O49) | asset pricing (G19) |
| volatility shocks (E32) | asset pricing (G19) |
| growth rate shocks (O49) | price-dividend ratio (G35) |
| volatility shocks (E32) | price-dividend ratio (G35) |