Is Economic Uncertainty Priced in the Cross-Section of Stock Returns?
51 Pages Posted: 9 Dec 2016 Last revised: 10 Dec 2016
Date Written: December 1, 2016
We investigate the role of economic uncertainty in the cross-sectional pricing of individual stocks and equity portfolios. We estimate stock exposure to an economic uncertainty index and show that stocks in the lowest uncertainty beta decile generate 6% more annualized risk-adjusted return compared to stocks in the highest uncertainty beta decile. We find that the uncertainty premium is driven by the outperformance (underperformance) by stocks with negative (positive) uncertainty beta. Our results indicate that uncertainty-averse investors demand extra compensation to hold stocks with negative uncertainty beta and they are willing to pay high prices for stocks with positive uncertainty beta.
Keywords: Economic uncertainty, uncertainty aversion, cross-section of stock returns, ICAPM, return predictability.
JEL Classification: G11, G12, C13, E20, E30.
Suggested Citation: Suggested Citation