We use non-Gaussian features in U.S. macroeconomic data to identify aggregate supply and demand shocks while imposing minimal economic assumptions. Macro risks represent the variables that govern the time-varying variance, skewness, and higher-order moments of these two shocks, with ”good” (”bad”) variance associated with positive (negative) skewness. We document that macro risks significantly contribute to the variation of yields and risk premiums for nominal bonds. While overall bond risk premiums are countercyclical, an increase in aggregate demand variance significantly lowers risk premiums. Macro risks also significantly predict future realized bond return variances.

We identify the relative importance of changes in the conditional variance of fundamentals (which we call “uncertainty”) and changes in risk aversion in the determination of the term structure, equity prices, and risk premiums. Theoretically, we introduce persistent time-varying uncertainty about the fundamentals in an external habit model. The model matches the dynamics of dividend and consumption growth, including their volatility dynamics and many salient asset market phenomena. While the variation in price–dividend ratios and the equity risk premium is primarily driven by risk aversion, uncertainty plays a large role in the term structure and is the driver of countercyclical volatility of asset returns.