Görtz, C. and Yeromonahos, M. (2022) Asymmetries in risk premia, macroeconomic uncertainty and business cycles. Journal of Economic Dynamics and Control, 137. 104330. ISSN 0165-1889
Abstract
A large literature suggests that the expected equity risk premium is countercyclical. Using a variety of different measures for this risk premium, we document that it also exhibits growth asymmetry, i.e. the risk premium rises sharply in recessions and declines much more gradually during the following recoveries. We show that a model with recursive preferences, in which agents cannot perfectly observe the state of current productivity, can generate the observed asymmetry in the risk premium. Key for this result are endogenous fluctuations in uncertainty which induce procyclical variations in agent’s nowcast accuracy. In addition to matching moments of the risk premium, the model is also successful in generating the growth asymmetry in macroeconomic aggregates observed in the data, and in matching the cyclical relation between quantities and the risk premium.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2022 Elsevier B.V. This is an author produced version of a paper subsequently published in Journal of Economic Dynamics and Control. Uploaded in accordance with the publisher's self-archiving policy. Article available under the terms of the CC-BY-NC-ND licence (https://creativecommons.org/licenses/by-nc-nd/4.0/). |
Keywords: | Risk premium; Business cycles; Bayesian learning; Asymmetry; Uncertainty; Nowcasting |
Dates: |
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Institution: | The University of Sheffield |
Academic Units: | The University of Sheffield > Faculty of Social Sciences (Sheffield) > Department of Economics (Sheffield) |
Depositing User: | Symplectic Sheffield |
Date Deposited: | 12 Sep 2022 11:28 |
Last Modified: | 09 Feb 2024 01:13 |
Status: | Published |
Publisher: | Elsevier BV |
Refereed: | Yes |
Identification Number: | 10.1016/j.jedc.2022.104330 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:190900 |
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Licence: CC-BY-NC-ND 4.0