Macro Strikes Back: Term Structure of Risk Premia and Market Segmentation

We develop a unified framework to study the term structure of risk premia of nontradable factors. Our method delivers level and time variation of risk premia, uncovers their propagation mechanism, is robust to misspecification and weak identification, and allows for segmented markets. Most macroeconomic factors are weakly identified at quarterly frequency, but have increasing (unconditional) term structures with large risk premia at business cycle horizons. Moreover, the macro risk premia are strongly time-varying and countercyclical. Most macroeconomic and intermediary-based factors command similar risk premia in equity and corporate bond markets, while we find strong evidence of segmentation for other factors.

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