Working Paper: NBER ID: w28184
Authors: Anna Cieslak; Hao Pang
Abstract: We propose an approach to identifying economic shocks (monetary, growth, and risk-premium news) from stock returns and Treasury yield changes, which allows us to study the drivers of asset prices at a daily frequency since the early 1980s. We apply the identification to examine investors’ responses to news from the Fed and key macro announcements. We uncover two risk-premium shocks—time-varying compensation for discount-rate and cash-flow news—which have distinct effects on stocks and bonds. Since the mid-1990s, the Fed-induced reductions in both risk premium sources have generated high average stock returns but an ambiguous response in bonds on FOMC days.
Keywords: economic shocks; monetary policy; risk premium; asset pricing
JEL Codes: E43; E44; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| growth news (O41) | stock prices (G12) |
| growth news (O41) | yields (G12) |
| monetary news (E42) | stock prices (G12) |
| monetary news (E42) | yields (G12) |
| risk premium shocks (G19) | stock returns (G12) |
| risk premium shocks (G19) | Treasury bond returns (G12) |
| reduction in common premium (G22) | Treasury bond returns (G12) |
| risk premium news (G19) | stock returns (G12) |
| growth news (O41) | stock returns (G12) |
| monetary news (E42) | stock returns (G12) |
| monetary news (E42) | two-year yield changes (E43) |
| risk premium shocks (G19) | ten-year yield changes (E43) |