News Shocks and Asset Prices

Abstract

We study the importance of anticipated shocks (news) for understanding the comovement between macroeconomic quantities and asset prices. We find that fourquarter anticipated investment shocks are an important source of fluctuations for macroeconomic variables: they account for about half of the variance in hours and investment. However, it is the four-quarter anticipated productivity shock that is driving a large fraction of consumption and most of the price-dividend ratio fluctuations. These productivity news are key for the model to reproduce the empirical tendency for stockmarket valuations and excess returns to lead the business cycle. Importantly, a model that does not use asset price information in the estimation would downplay the role of productivity news; in this case, the model implies that return moves (almost) completely contemporaneously with the economic activity, counterfactually with the data. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published.Requests for permission to reproduce any article or part of the Working Paper should be sent to the editor at the above address. AbstractWe study the importance of anticipated shocks (news) for understanding the comovement between macroeconomic quantities and asset prices. We find that four-quarter anticipated investment shocks are an important source of fluctuations for macroeconomic variables: they account for about half of the variance in hours and investment. However, it is the four-quarter anticipated productivity shock that is driving a large fraction of consumption and most of the price-dividend ratio fluctuations. These productivity news are key for the model to reproduce the empirical tendency for stock-market valuations and excess returns to lead the business cycle. Importantly, a model that does not use asset price information in the estimation would downplay the role of productivity news; in this case, the model implies that return moves (almost) completely contemporaneously with the economic activity, counterfactually with the data.JEL classification: C22, E32, E44, G12, G17

News-Driven Business Cycles: Insights and Challenges

“…Finally, Malkhozov and Shamloo (2012) introduce nonseparable Epstein and Zin (1989) preferences in an RBC model with news shocks and show that it creates a persistent predictable component in consumption growth, that is often referred to as long-run risk in the finance literature (Bansal and Yaron 2004). Although the model does not allow for variable labor, so that consumption and investment move in opposite direction following a technological news, an extension with variable labor supply could potentially solve the static problem.…”

Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle

“…Some consider rational expectations models with time variation in higher moments of the shock distributions. The latter can take the form of time varying disaster risk (Gourio (2012)) or stochastic volatility (Basu and Bundick (2012), Caldara et al (2012), Malkhozov and Shamloo (2012)). Another line of work investigates uncertainty shocks when agents have a preference for robustness (Cagetti et al (2002), Bidder and Smith (2012), Jahan-Parvar and Liu (2012)).…”

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“…11 A partial list of the rapidly increasing macroeconomic literature on news shocks includes Beaudry andPortier (2006, 2014), Jaimovich and Rebelo (2009), Barsky and Sims (2011), Schmitt-Grohe and Uribe (2012), Kurmann and Otrok (2013), Malkhozov and Tamoni (2015).…”