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Market-Based Solutions to Vital Economic Issues


Kenan Institute 2024 Grand Challenge: Business Resilience
Market-Based Solutions to Vital Economic Issues
Nov 30, 2023

Does Cross-Sectional Asset Pricing Matter for the Macroeconomy?


Yes. The quantity of risk underlying cross-sectional return spreads is time-varying, yielding swings in factors’ risk premia. We define “macro-relevant” factors as those whose risk premium variation induce consumption fluctuations, and more broadly, a business-cycle. While most factors documented in the literature are vetted in this manner, a handful of factors’ risk matter for economic growth, above and beyond changes in market risk. We cluster macro-relevant factors based on their impact in frequency domains. Macro-relevant factors mostly relate to profitability, organization capital, financial conditions, or inventory. Interestingly, many factors’ risk premia are associated with expansions, unlike the market risk premium.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.  

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