Asymmetries in Risk Premia, Macroeconomic Uncertainty and Business Cycles

Yeromonahos, M. and Christoph, G. 2021. Asymmetries in Risk Premia, Macroeconomic Uncertainty and Business Cycles. Journal of Economic Dynamics and Control.

TitleAsymmetries in Risk Premia, Macroeconomic Uncertainty and Business Cycles
TypeJournal article
AuthorsYeromonahos, M.
Christoph, G.

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.

Keywordsrisk premium, business cycles, Bayesian learning, asymmetry, uncertainty, nowcasting
JournalJournal of Economic Dynamics and Control
Accepted author manuscript
File Access Level
Open (open metadata and files)

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