Micro uncertainty and asset prices

Size and value premia comove strongly with one another at low frequencies, but they are both negatively related to long-run movements in the equity premium. We explain these patterns in an investment-based asset pricing model featuring persistent micro and macro uncertainty. Micro uncertainty generates size and value premia waves, while macroeco-nomic uncertainty produces equity premium waves. The negative correlation between mi-cro and macro uncertainty at low frequencies explains why the equity premium is a long-term hedge for size and value premia. Persistent micro uncertainty is also a source of instability for size and value factors in short samples.(c) 2023 Published by Elsevier B.V.