Macro Risk Premia and Stock Returns: An Open Economy Dynamic Stochastic General Equilibrium Approach

ABSTRACT To examine the relationship between model–based macroeconomic risk premia and empirical asset–pricing factors, we estimate internal and external macroeconomic shocks using a widely applied DSGE model in macroeconomic analyses. Macroeconomic shocks are significantly priced, and the associated premia explain substantial variation in factors commonly used in the asset–pricing literature. Augmenting the Fama–French six–factor model with model–implied risk factors enhances its performance, although pricing errors remain. Moreover, premia for both internal and external shocks have significant explanatory power, highlighting the importance of external economic linkages.