News, noise and the cross section of stock returns,
Subject
Finance
Publishing details
Working Paper
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
