Journal of Financial Economics Vol. 149 No. 1 2023

Micro uncertainty and asset prices

Bernard Herskovic^1,2; Thilo Kind³; Howard Kung^4,5

¹ University of California, Los Angeles · ² National Bureau of Economic Research · ³ Leibniz Institute for Financial Research SAFE · ⁴ Centre for Economic Policy Research · ⁵ London Business School

Abstract

Size and value premia comove strongly with one another at low frequencies, but they are both negatively related to long-run movements in the equity premium. We explain these patterns in an investment-based asset pricing model featuring persistent micro and macro uncertainty. Micro uncertainty generates size and value premia waves, while macroeconomic uncertainty produces equity premium waves. The negative correlation between micro and macro uncertainty at low frequencies explains why the equity premium is a long-term hedge for size and value premia. Persistent micro uncertainty is also a source of instability for size and value factors in short samples.

DOI

10.1016/j.jfineco.2023.04.006

Volume

149

Issue

1

Pages

27-51

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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