"Hedging economic uncertainty from the cross section of stock returns," with Fengtian Yang and Hector Calvo-Pardo
Abstract: We examine the pricing of economic uncertainty in the cross-section of stock returns. Uncertainty is proxied by innovations to the macroeconomic and financial volatility measures in Jurado, Ludvigson and Ng (2015) and Ludvigson, Ma and Ng (2021). In contrast to existing literature, a negative uncertainty risk premium is found in calm periods, turning positive in turbulent ones. These findings are rationalized by means of a hedging portfolio that delivers positive returns in turbulent periods to compensate for the cost of insuring the portfolio in calm periods. We also provide statistical evidence of the uncertainty factors' added value and their relative predictive power across uncertainty regimes.
"Testing for nontrivial cointegration," with Javier Hualde
Abstract: Cointegration, as introduced by Engle and Granger (1987), is pivotal in analyzing long-run equilibrium relationships among economic variables. While traditional cointegration models have been effective in handling mixed-order integrated variables, they can lead to misleading conclusions from an economic equilibrium perspective if trend stationary observables are involved. This type of variables lead to the so-called trivial cointegration, which might falsely suggest a long-run relationship where none exists. Testing for nontrivial cointegration is possible using standard methods (like ADF, KPSS or Johansen's approach), but this necessarily requires a sequential method involving either pre-testing or post-testing, and, moreover, it typically leads to an inconsistent test. This paper proposes a direct and consistent test for nontrivial cointegration in a bivariate setting motivated by the different behavior of the sample correlation between the observables under various cointegration scenarios. Unlike residual-based methods, our proposal is invariant to the ordering of the variables and it is also robust to different initial conditions and deterministic components. Our testing approach is compared with standard methods by means of a Monte Carlo experiment, and we include the analysis of an empirical application to the term structure of nominal interest rates for the United States.