Horizon-specific macroeconomic risks and the cross section of expected returns
We show that decomposing macroeconomic risks across horizon is key to uncover a tight link between risk premia and the real economy. Exposure in four-year returns to macroeconomic growth and volatility with a matching half-life is priced in a wide variety of test assets. Shorter-term risks are not priced. We show that long-term growth and volatility capture largely common risk. Finally, we propose a single, long-term, macroeconomic risk factor that drives out standard long-run risk measures and performs similar to the Fama-French three-factor model in cross-sectional tests. Our results entail using long-horizon betas to measure macroeconomic risks in asset returns.