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News, noise and the cross section of stock returns,

Subject

Finance

Publishing details

Working Paper

Authors / Editors

Bretscher L;Malkhozov A;Tamoni A

Publication Year

2019

Abstract

We examine the role of agents’ expectations about the future economic fundamentals for the identification of the aggregate risk. To this end, we estimate a New-Keynesian general equilibrium model augmented with expectation, or news, shocks. Accounting for agents’ expectations at the business cycle horizon results in aggregate risk factor innovations that have significant explanatory power for the cross section of stock and bond returns. In particular, news offer a novel explanation for the value premium consistent with the role of the market-to-value component of the value strategy returns. Moreover, news are important to price the cash-flow duration sorted portfolios.

Keywords

News Shocks; Consumption-CAPM; Cross Section of Returns; Market-to-Book Decomp

Series

Working Paper

Available on ECCH

No


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