Hedging Macroeconomic and Financial Uncertainty and Volatility

We study the pricing of shocks to uncertainty and volatility using a novel and wide-ranging set of options contracts. If uncertainty shocks are viewed as bad by investors, portfolios that hedge them should earn negative premia. Empirically, however, such portfolios have historically earned significantly positive returns. Instead, it is portfolios exposed to the realization of large shocks to fundamentals that have historically earned negative premia. These results imply that it is large realizations of shocks to fundamentals, not forward-looking uncertainty shocks, that drive investors' marginal utility; in turn, these implications dictate the role of volatility in macroeconomic models