Macroeconomic risks, idiosyncratic risks and momentum profits

Momentum Profits and Non-Normality Risks

Momentum Profits and Macroeconomic Risk

Previous work shows that the growth rate of industrial production is a common macroeconomic risk factor in the cross-section of expected returns. We demonstrate the connection between momentum profits and shifts in factor loadings on this macroeconomic variable. Winners have temporarily higher loadings on the growth rate of industrial production than losers. The loading dispersion derives mostl...

Momentum and Contrarian Profits and Macroeconomic Fundamentals

We show that the existence of momentum and contrarian profits imposes restrictions on stochastic discount factors used to price stocks in equity markets. For several widely used asset pricing models, we demonstrate that these restrictions imply testable forms of intertemporal dependence in macroeconomic fundamentals such as consumption growth rate. Extensive empirical analysis provides supporti...

Unspanned Macroeconomic Risks in Oil Futures

This paper constructs a macro-finance model for commodity futures. I document a feedback relationship between crude oil prices and real economic activity. The channel from real activity to oil prices is unspanned – meaning not identified in current futures prices – consistent with oil futures as a hedge asset against supply shocks. Unspanned macroeconomic risks have first order effects on risk ...

Microeconomic Origins of Macroeconomic Tail Risks

We document that even though the normal distribution is a good approximation to the nature of aggregate fluctuations, it severely underpredicts the frequency of large economic downturns. We then provide a model that can explain these facts simultaneously. Our model shows that the propagation of microeconomic shocks through input-output linkages can fundamentally reshape the distribution of aggr...