Finance Seminar（2014-09）

Topic :Macroeconomic Risks and Asset Pricing: Evidence from a Dynamic Stochastic General Equilibrium Model

Speaker:Erica X.N. Li, Cheung Kong Graduate School of Business

Time:Wednesday, 9 April, 10:00-11:30

Location:Room 217, Guanghua Building 2

Abstract：We study the relation between macroeconomic fundamentals and asset pricing through the lens of a state of the art dynamic stochastic general equilibrium (DSGE) model considered in Christiano, Trabandt and Walentin (2011). We provide a full-information Bayesian estimation of the model using macro variables and extract three fundamental shocks to the economy through the model: neutral technology (NT) shock, investment-specific technological (IST) shock, and monetary policy (MP) shock. Based on the estimations, we construct the model-implied stochastic discount factor (SDF) for the period of 1966Q1-2010Q3. Tests based on the second Hansen-Jagannathan distance show that the model-implied SDF performs as well as the Fama and French three-factor model using a set of test assets including the 25 size/BM, 30 industry, long-term corporate and government bond portfolios. If the SDF is estimated as a linear function of the model-implied SDF, the estimated SDF out performs the Fama and French three-factor model even in explaining the returns of the 25 size/BM portfolios. Our results show that DSGE models, which have been successful in modeling macroeconomic dynamics, have great potential in capturing asset price dynamics as well.