Title: The Dynamic Effects of Uncertainty and Risk Aversion on Real Activity Betas of Stock Markets Factor Risks? (original) (raw)

A multi-dynamic-factor model for stock returns

Journal of Econometrics, 1992

In this paper, we define dynamic and static factors and distinguish between the dynamic and static structure of asset excess returns. We examine the value-weighted market portfolio as a dynamic factor and propose an intuitively appealing procedure to search for more dynamic factors. We find evidence that the market is a dynamic factor but a three-dynamic-factor model is superior in modelling the decile portfolios. The two additional factors are correlated with a January dummy and Bond risk premium and with production growth and a recession dummy, respectively. We found that small firms are more sensitive to the January/Bond risk factor, while large firms are more sensitive to the Production/Recession factor. We found that after accounting for the systematic risk corresponding to the three dynamic factors, there is not much of a static component of asset risk premium and there is no evidence for a higher 'unexplained' return on small firm portfolios.

Heterogeneity in the dynamic effects of uncertainty on investment

Canadian Journal of Economics/Revue canadienne d'économique, 2018

How does aggregate profit uncertainty influence investment activity at the firm level? We propose a parsimonious adaptation of a factor-autoregressive conditional heteroscedasticity model to exploit information in a subindustry sales panel for an efficient and tractable estimation of aggregate volatility. The resulting uncertainty measure is then included in an investment forecasting model interacted with firm-specific coefficients. We find that higher profit uncertainty induces firms to lower capital expenditure on average, yet to a considerably different degree: for example, both small and large firms are expected to reduce investment much more than medium-sized firms. This highlights significant and substantial heterogeneity in the uncertainty transmission mechanism.

Investors' Uncertainty and Stock Market Risk

The authors propose a novel approach to model investors' uncertainty using the conditional volatility of investors' sentiment. Working with weekly data on investor sentiment, 6 major U.S. stock indices, and alternative measures of uncertainty, they run various tests to validate the proposed measure. The estimates show that investors' uncertainty is greater during economic downturns, and it is linked with lower investors' sentiment. In addition, the results support the existence of a positive conditional correlation between sentiment and returns. This positive spillover between sentiment and returns is interpreted as a positive link between investors' uncertainty and market risk. The authors also find that investors' uncertainty and market risk are strongly driven by their lagged values. The authors' measure consistently captures periods of high uncertainty as shown by a positive and highly statistically significant correlation with other existing measures of uncertainty.

Real and financial uncertainty and investment decisions

Journal of Macroeconomics, 2000

This paper aims at analyzing the role of uncertainty on investment. In our analysis we will follow recent economic literature concerning stochastic models of irreversible investment and restrict our attention to the Italian economy. We show that theoretically, and in the presence of irreversibility, demand and interest rate uncertainty both reduce demand for capital. Our empirical results support the traditional interpretation according to which expected demand growth rates positively affect investment, while the interest rate level is negatively correlated to the accumulation rate. As for uncertainty, investment decisions in Italy are negatively affected by demand volatility, while interest rate volatility seems to play no significant role.

Essays on Risk Appetite and Uncertainty

2018

Essays on Risk Appetite and Uncertainty Ran (Nancy) Xu This dissertation focuses on the identification of the dynamics of risk aversion (price of risk) and economic uncertainties (amount of risk) and their effects on both domestic and international asset markets. In the first essay, I study the differences between global equity return comovements and global bond return comovements and use a consistent and flexible asset pricing framework to motivate and quantify the role of various economic determinants in explaining the comovement difference. This study contributes to the recent debate on how shocks transmit across countries, and documents that the "risk compensation" channel plays a major role in affecting international comovements. In the second essay, I find that fundamental shocks (consumption growth) and cash flow shocks (dividend growth) comove procyclically. This new stylized fact helps explain the "Duffee Puzzle" (Duffee, 2005): stock returns and consumption growth covary procyclically, whereas the Global Risk Aversion and International Return Comovements This article addresses the ongoing debate about the relative importance of fundamental sources of risk that transmit across countries, and provides evidence for the role of "global" risk aversion. I first compare international equity and bond return comovements, and establish three new stylized facts: (1) bond return correlations are smaller in magnitude than equity return correlations, (2) equity returns have downside correlations that are significantly higher than upside correlations, while bond return correlations are symmetric, and (3) equity return correlations are countercyclical, while bond return correlations are weakly procyclical. I then interpret the stylized facts in the context of a linear dynamic factor model, which is motivated using a dynamic no-arbitrage asset pricing model. The theoretical model features time-varying global economic uncertainties (of output growth, inflation, and real interest rates) and time-varying risk aversion (of a global investor) and consistently prices international equities and Treasury bonds. I find that all three stylized facts above can be explained by the different sensitivities of equity returns (strongly negative) and bond returns (weakly positive or negative) to the global risk aversion shock. In addition, global risk aversion explains 90 percent of the fitted global equity conditional comovements and 40 percent of the fitted global bond conditional comovements, after controlling for a wide set of global economic uncertainties. Inflation upside uncertainty is the other key driver for global bond comovement.

Changes In Factor Betas and Risk Premiums Over Varying Market Conditions

Financial Review, 1998

We show risk exposures and premiums associated with the Chen, Roll, and Ross (1986) risk factors change over time and depend on stock market and business cycle condition. Findings also indicate that factor risk premiums change sign between January and non-January, ...

Investments and uncertainty revisited: the case of the US economy

Applied Economics, 2017

This paper examines the relationship between investments and uncertainty for the US economy, as the latter is approximated by consumer sentiment, purchasing managers' prospects and economic policy uncertainty. Contrary to the existing literature, we provide evidence that this relationship is time-varying. The time variation is attributed to the observed temporal replacement effect between private and public investments. Furthermore, we show that there are two distinct correlation regimes in this relationship and unless we concentrate on the two regimes, we cannot fully unravel the real link between uncertainty and investments. Finally, we examine whether the use of two correlation regimes provides better forecasts of investments compared to the use of the uncertainty indices alone. The forecasting exercise reveals that the use of correlation regimes provides statistically superior out-of-sample forecasts.

Unveiling the black swan of the Real Risk-Returns Nexus: Evidence from Pakistan Stock Exchange

The risk-free rates are widely used as benchmark to measure excess stocks returns or excess market returns and contribute a significant role in Asset Pricing Models. The purpose of this study is to scrutinize the risk and real excess portfolio returns using inflation adjusted risk-free rates, a unique measuring technique with a primary focus on the momentum augmented Fama-French five-factor model, utilising monthly data for 1994-2022 from the Pakistan Stock Exchange. Using OLS regression technique, the findings reveal that except profitability, the market, size, value, momentum and investment move largely correlated with excess portfolio stocks returns. The Gibbons, Ross & Shanken test confirms that the momentum augmented Fama-French five-factor model outperforms in the market.

The Impact of Uncertainty in Macroeconomic Variables on Stock Returns in the USA

Journal of Risk and Financial Management

In this research paper, the impact of macroeconomic uncertainty on stock returns in the United States of America is examined. To measure this macroeconomic uncertainty, a survey of Consensus Economics with data ranging from 1989 until 2019 was employed. The survey consists of monthly forecasts for several macroeconomic variables for multiple countries. Four uncertainty measures were developed, based on the standard deviation, interquartile range, high-minus-low and an AR- and GARCH model. By performing linear regressions, a positive relationship between macroeconomic uncertainty and stock returns was identified for, on average, 13 out of 49 sectors, which is consistent with economic theory. Furthermore, the standard deviation of stock returns was regressed on macroeconomic uncertainty. A positive relationship was found for, on average, 41.7 out of 49 sectors. The results are discussed at a general level, at the level of the macroeconomic variables and at the sector level.

Uncertainty determinants of firm investment

Economics Letters, 2008

We investigate the impact of measures of uncertainty on firms' capital investment behavior using a panel of U.S. firms. Increases in firmspecific and CAPM-based measures have a significant negative effect on investment spending, while market-based uncertainty has a positive impact.