The Causal Impact of Macroeconomic Uncertainty on Expected Returns

I quantify the causal impact of macroeconomic uncertainty on time-varying expected returns. The exogenous timing of macroeconomic announcements provides an instrument for uncertainty. Using daily measures of macroeconomic uncertainty and expected equity market returns, I find announcements resolve uncertainty, which causes expected returns to fall. Under weak assumptions, macroeconomic uncertainty accounts for at most 35% of expected return variation. Under the additional, empirically justified assumption that no other expected return driver moves on announcements, macroeconomic uncertainty accounts for 12% of expected return variation and a one standard deviation increase in macroeconomic uncertainty raises long-run expected returns by 185 basis points