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Is economic uncertainty priced in the cross-section of stock returns?

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  • Bali, Turan G.
  • Brown, Stephen J.
  • Tang, Yi

Abstract

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.

Suggested Citation

  • Bali, Turan G. & Brown, Stephen J. & Tang, Yi, 2017. "Is economic uncertainty priced in the cross-section of stock returns?," Journal of Financial Economics, Elsevier, vol. 126(3), pages 471-489.
    • Handle: RePEc:eee:jfinec:v:126:y:2017:i:3:p:471-489
    DOI: 10.1016/j.jfineco.2017.09.005
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    More about this item

    Keywords

    Economic uncertainty; Uncertainty aversion; Cross-section of stock returns; ICAPM; Return predictability;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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