The Real Response to Uncertainty Shocks: The Risk Premium Channel

Lorenzo Bretscher, Alex Hsu, Andrea Tamoni

Research output: Contribution to journalArticlepeer-review

2 Scopus citations


Uncertainty shocks are also risk premium shocks. With countercyclical risk aversion (RA), a positive shock to uncertainty increases risk and elevates RA as consumption growth falls. The combination of high RA and high uncertainty produces significant equity risk premia in bad times, which in turn, exacerbate the decline of macroeconomic aggregates and equity prices. Moreover, in the cross-section of equity returns, investors demand a risk premium for stocks that perform poorly in times of high uncertainty and elevated risk aversion. In a model with endogenously time-varying RA, uncertainty shocks lead to large falls in investment and equity prices that closely match state-dependent data responses.

Original languageEnglish (US)
Pages (from-to)119-140
Number of pages22
JournalManagement Science
Issue number1
StatePublished - Jan 2023

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research


  • conditional IRF
  • dynamic economies
  • risk aversion
  • uncertainty


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