Working Paper: NBER ID: w26323
Authors: Ian Dewbecker; Stefano Giglio; Bryan T. Kelly
Abstract: We study the pricing of uncertainty shocks using a wide-ranging set of options that reveal premia for macroeconomic risks. Portfolios hedging macro uncertainty have historically earned zero or even significantly positive returns, while those exposed to the realization of large shocks have earned negative premia. The results are consistent with an important role for "good uncertainty". Options for nonfinancials are particularly important for spanning macro risks and good uncertainty. The results dictate the role of uncertainty and volatility in structural models and we show they are consistent with a simple extension of the long-run risk model.
Keywords: uncertainty shocks; volatility; macroeconomic risks; risk premia
JEL Codes: E32; G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| uncertainty shocks (D89) | economic outcomes (F61) |
| portfolios hedging against uncertainty shocks (G11) | positive returns for non-financial underlying assets (G19) |
| high uncertainty about the real economy (D89) | perceived as beneficial (D61) |
| portfolios hedging realized volatility (G11) | negative returns (G12) |
| large shocks to fundamentals (E32) | viewed as detrimental (D62) |
| high realized volatility (G17) | adverse economic conditions (E66) |
| pricing of realized volatility (G17) | reflects investor aversion to downward jumps (G11) |
| skewness risk (C46) | investors sensitive to downward jumps in the economy (E32) |