IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v171y2025ics0378426624002887.html
   My bibliography  Save this article

Uncertainty and cross-sectional stock returns: Evidence from China

Author

Listed:
  • Deschamps, Bruno
  • Fei, Tianlun
  • Jiang, Ying
  • Liu, Xiaoquan

Abstract

We study the impact of macroeconomic and financial uncertainties on cross-sectional returns in the Chinese stock market. We find that stocks with a lower macroeconomic uncertainty beta generate higher excess returns, implying that macroeconomic uncertainty commands a negative risk premium. Meanwhile, the exposure to financial uncertainty is not priced in stock returns. Unlike financial uncertainty, macroeconomic uncertainty is a state variable that predicts a deterioration in economic activity, suggesting that investors require a premium for holding stocks that correlate negatively with it.

Suggested Citation

  • Deschamps, Bruno & Fei, Tianlun & Jiang, Ying & Liu, Xiaoquan, 2025. "Uncertainty and cross-sectional stock returns: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 171(C).
    • Handle: RePEc:eee:jbfina:v:171:y:2025:i:c:s0378426624002887
    DOI: 10.1016/j.jbankfin.2024.107374
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426624002887
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2024.107374?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Segal, Gill & Shaliastovich, Ivan & Yaron, Amir, 2015. "Good and bad uncertainty: Macroeconomic and financial market implications," Journal of Financial Economics, Elsevier, vol. 117(2), pages 369-397.
    2. Lakdawala, Aeimit & Moreland, Timothy & Schaffer, Matthew, 2021. "The international spillover effects of US monetary policy uncertainty," Journal of International Economics, Elsevier, vol. 133(C).
    3. Michael W. McCracken & Serena Ng, 2016. "FRED-MD: A Monthly Database for Macroeconomic Research," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 34(4), pages 574-589, October.
    4. Nicholas Bloom & Max Floetotto & Nir Jaimovich & Itay Saporta†Eksten & Stephen J. Terry, 2018. "Really Uncertain Business Cycles," Econometrica, Econometric Society, vol. 86(3), pages 1031-1065, May.
    5. Andrew Ang & Geert Bekaert, 2007. "Stock Return Predictability: Is it There?," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 651-707.
    6. Caldara, Dario & Fuentes-Albero, Cristina & Gilchrist, Simon & Zakrajšek, Egon, 2016. "The macroeconomic impact of financial and uncertainty shocks," European Economic Review, Elsevier, vol. 88(C), pages 185-207.
    7. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    8. Redl, Chris, 2020. "Uncertainty matters: Evidence from close elections," Journal of International Economics, Elsevier, vol. 124(C).
    9. Hsieh, Shu-Fan & Chan, Chia-Ying & Wang, Ming-Chun, 2020. "Retail investor attention and herding behavior," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 109-132.
    10. Pástor, Ľuboš & Veronesi, Pietro, 2013. "Political uncertainty and risk premia," Journal of Financial Economics, Elsevier, vol. 110(3), pages 520-545.
    11. Song Han & Xing Zhou, 2014. "Informed Bond Trading, Corporate Yield Spreads, and Corporate Default Prediction," Management Science, INFORMS, vol. 60(3), pages 675-694, March.
    12. Lars A. Lochstoer & Paul C. Tetlock, 2020. "What Drives Anomaly Returns?," Journal of Finance, American Finance Association, vol. 75(3), pages 1417-1455, June.
    13. Nartea, Gilbert V. & Wu, Ji & Liu, Zhentao, 2013. "Does idiosyncratic volatility matter in emerging markets? Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 137-160.
    14. Fernald, John G. & Hsu, Eric & Spiegel, Mark M., 2021. "Is China fudging its GDP figures? Evidence from trading partner data," Journal of International Money and Finance, Elsevier, vol. 110(C).
    15. Bekaert, Geert & Engstrom, Eric & Xing, Yuhang, 2009. "Risk, uncertainty, and asset prices," Journal of Financial Economics, Elsevier, vol. 91(1), pages 59-82, January.
    16. Barbara Rossi & Tatevik Sekhposyan, 2015. "Macroeconomic Uncertainty Indices Based on Nowcast and Forecast Error Distributions," American Economic Review, American Economic Association, vol. 105(5), pages 650-655, May.
    17. Ravi Bansal & Dana Kiku & Ivan Shaliastovich & Amir Yaron, 2014. "Volatility, the Macroeconomy, and Asset Prices," Journal of Finance, American Finance Association, vol. 69(6), pages 2471-2511, December.
    18. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    19. Bekaert, Geert & Hoerova, Marie, 2014. "The VIX, the variance premium and stock market volatility," Journal of Econometrics, Elsevier, vol. 183(2), pages 181-192.
    20. Andersen, Torben G & Bollerslev, Tim, 1998. "Answering the Skeptics: Yes, Standard Volatility Models Do Provide Accurate Forecasts," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 885-905, November.
    21. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Bad Beta, Good Beta," American Economic Review, American Economic Association, vol. 94(5), pages 1249-1275, December.
    22. Bali, Turan G. & Zhou, Hao, 2016. "Risk, Uncertainty, and Expected Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(3), pages 707-735, June.
    23. Davide Pettenuzzo & Riccardo Sabbatucci & Allan Timmermann, 2020. "Cash Flow News and Stock Price Dynamics," Journal of Finance, American Finance Association, vol. 75(4), pages 2221-2270, August.
    24. Jonathan Brogaard & Andrew Detzel, 2015. "The Asset-Pricing Implications of Government Economic Policy Uncertainty," Management Science, INFORMS, vol. 61(1), pages 3-18, January.
    25. Hui Chen, 2010. "Macroeconomic Conditions and the Puzzles of Credit Spreads and Capital Structure," Journal of Finance, American Finance Association, vol. 65(6), pages 2171-2212, December.
    26. Bianconi, Marcelo & Esposito, Federico & Sammon, Marco, 2021. "Trade policy uncertainty and stock returns," Journal of International Money and Finance, Elsevier, vol. 119(C).
    27. Whitney K. Newey & Kenneth D. West, 1994. "Automatic Lag Selection in Covariance Matrix Estimation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(4), pages 631-653.
    28. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," The Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-386.
    29. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    30. Li, Xiao-Ming, 2017. "New evidence on economic policy uncertainty and equity premium," Pacific-Basin Finance Journal, Elsevier, vol. 46(PA), pages 41-56.
    31. Oliver Boguth & Lars‐Alexander Kuehn, 2013. "Consumption Volatility Risk," Journal of Finance, American Finance Association, vol. 68(6), pages 2589-2615, December.
    32. Kyle Jurado & Sydney C. Ludvigson & Serena Ng, 2015. "Measuring Uncertainty," American Economic Review, American Economic Association, vol. 105(3), pages 1177-1216, March.
    33. Liu, Jianan & Stambaugh, Robert F. & Yuan, Yu, 2019. "Size and value in China," Journal of Financial Economics, Elsevier, vol. 134(1), pages 48-69.
    34. Baltussen, Guido & van Bekkum, Sjoerd & van der Grient, Bart, 2018. "Unknown Unknowns: Uncertainty About Risk and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(4), pages 1615-1651, August.
    35. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    36. R?diger Bachmann & Steffen Elstner & Eric R. Sims, 2013. "Uncertainty and Economic Activity: Evidence from Business Survey Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 217-249, April.
    37. Banerjee, Prithviraj S. & Doran, James S. & Peterson, David R., 2007. "Implied volatility and future portfolio returns," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3183-3199, October.
    38. Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," American Economic Review, American Economic Association, vol. 101(6), pages 2723-2753, October.
    39. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    40. Geert Bekaert & Eric C. Engstrom & Nancy R. Xu, 2022. "The Time Variation in Risk Appetite and Uncertainty," Management Science, INFORMS, vol. 68(6), pages 3975-4004, June.
    41. Tse-Chun Lin & Xin Liu, 2018. "Skewness, Individual Investor Preference, and the Cross-section of Stock Returns [Illiquidity and stock returns: cross-section and time-series effects]," Review of Finance, European Finance Association, vol. 22(5), pages 1841-1876.
    42. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    43. Nartea, Gilbert V. & Kong, Dongmin & Wu, Ji, 2017. "Do extreme returns matter in emerging markets? Evidence from the Chinese stock market," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 189-197.
    44. Sudheer Chava & Alex Hsu & Robin Greenwood, 2020. "Financial Constraints, Monetary Policy Shocks, and the Cross-Section of Equity Returns," The Review of Financial Studies, Society for Financial Studies, vol. 33(9), pages 4367-4402.
    45. Zhou, Zhengyi, 2017. "Government ownership and exposure to political uncertainty: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 84(C), pages 152-165.
    46. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    47. Ozturk, Ezgi O. & Sheng, Xuguang Simon, 2018. "Measuring global and country-specific uncertainty," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 276-295.
    48. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
    49. Fernald, John G. & Hsu, Eric & Spiegel, Mark M., 2021. "Reprint: Is China fudging its GDP figures? Evidence from trading partner data," Journal of International Money and Finance, Elsevier, vol. 114(C).
    50. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    51. Liang Dong & Hung Wan Kot & Keith S. K. Lam & Bo Yu, 2022. "China vs. U.S.: is co-skewness risk priced differently?," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 29(5), pages 1333-1353, September.
    52. John H. Rogers & Jiawen Xu, 2019. "How Well Does Economic Uncertainty Forecast Economic Activity?," Finance and Economics Discussion Series 2019-085, Board of Governors of the Federal Reserve System (U.S.).
    53. 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.
    54. Larry G. Epstein, 1999. "A Definition of Uncertainty Aversion," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(3), pages 579-608.
    55. Long Chen & Zhi Da & Xinlei Zhao, 2013. "What Drives Stock Price Movements?," The Review of Financial Studies, Society for Financial Studies, vol. 26(4), pages 841-876.
    56. Wei Xiong & Jialin Yu, 2011. "The Chinese Warrants Bubble," Working Papers 1398, Princeton University, Department of Economics, Econometric Research Program..
    57. Kozeniauskas, Nicholas & Orlik, Anna & Veldkamp, Laura, 2018. "What are uncertainty shocks?," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 1-15.
    58. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    59. Sydney C. Ludvigson & Sai Ma & Serena Ng, 2021. "Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(4), pages 369-410, October.
    60. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    61. repec:bla:jfinan:v:59:y:2004:i:4:p:1481-1509 is not listed on IDEAS
    62. Chung, Kee H. & Chuwonganant, Chairat, 2014. "Uncertainty, market structure, and liquidity," Journal of Financial Economics, Elsevier, vol. 113(3), pages 476-499.
    63. Itamar Drechsler, 2013. "Uncertainty, Time-Varying Fear, and Asset Prices," Journal of Finance, American Finance Association, vol. 68(5), pages 1843-1889, October.
    64. Li Pan & Ya Tang & Jianguo Xu, 2016. "Speculative Trading and Stock Returns," Review of Finance, European Finance Association, vol. 20(5), pages 1835-1865.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lin, Jianhao & Fan, Jiacheng & Zhang, Yifan, 2025. "Information Dissemination and the Monetary Policy Uncertainty Premium: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 171(C).
    2. 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.
    3. Nartea, Gilbert V. & Bai, Hengyu & Wu, Ji, 2020. "Investor sentiment and the economic policy uncertainty premium," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    4. Tong, Chen & Huang, Zhuo & Wang, Tianyi & Zhang, Cong, 2023. "The effects of economic uncertainty on financial volatility: A comprehensive investigation," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 369-389.
    5. Lee, Kiryoung & Joen, Yoontae & Kim, Minki, 2022. "Which uncertainty measures matter for the cross-section of stock returns?#," Finance Research Letters, Elsevier, vol. 46(PB).
    6. Tengfei Zhang, 2020. "Manager Uncertainty and Cross-Sectional Stock Returns," 2020 Papers pzh934, Job Market Papers.
    7. Dunbar, Kwamie, 2021. "Pricing the hedging factor in the cross-section of stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    8. Wei, Xin & Liu, Xi & Zhang, Xueyong, 2022. "Shadow banking and the cross-section of stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    9. Bianconi, Marcelo & Esposito, Federico & Sammon, Marco, 2021. "Trade policy uncertainty and stock returns," Journal of International Money and Finance, Elsevier, vol. 119(C).
    10. Costantini, Mauro & Sousa, Ricardo M., 2022. "What uncertainty does to euro area sovereign bond markets: Flight to safety and flight to quality," Journal of International Money and Finance, Elsevier, vol. 122(C).
    11. Yu, Deshui & Huang, Difang, 2023. "Cross-sectional uncertainty and expected stock returns," Journal of Empirical Finance, Elsevier, vol. 72(C), pages 321-340.
    12. Peng, Ya & Zhang, Xueyong, 2024. "Economic policy uncertainty in OFDI host countries and the cross-section of stock returns," Journal of International Money and Finance, Elsevier, vol. 149(C).
    13. González-Sánchez, Mariano & Nave, Juan & Rubio, Gonzalo, 2020. "Effects of uncertainty and risk aversion on the exposure of investment-style factor returns to real activity," Research in International Business and Finance, Elsevier, vol. 53(C).
    14. Ali, Sara & Badshah, Ihsan & Demirer, Riza & Hegde, Prasad, 2022. "Economic policy uncertainty and institutional investment returns: The case of New Zealand," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    15. Cheng, Feiyang & Wang, Chunfeng & Cui, Xin & Wu, Ji & He, Feng, 2021. "Economic policy uncertainty exposure and stock price bubbles: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 78(C).
    16. Jiang, Fuwei & Kang, Jie & Meng, Lingchao, 2024. "Certainty of uncertainty for asset pricing," Journal of Empirical Finance, Elsevier, vol. 78(C).
    17. Nam, Eun-Young & Lee, Kiryoung & Jeon, Yoontae, 2021. "Macroeconomic uncertainty shocks and households’ consumption choice," Journal of Macroeconomics, Elsevier, vol. 68(C).
    18. Jiang, Fuwei & Liu, Hongkui & Yu, Jiasheng & Zhang, Huajing, 2023. "International stock return predictability: The role of U.S. uncertainty spillover," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    19. Himounet, Nicolas, 2022. "Searching the nature of uncertainty: Macroeconomic and financial risks VS geopolitical and pandemic risks," International Economics, Elsevier, vol. 170(C), pages 1-31.
    20. Marton Lotz & Daniel Ruf & Johannes Strobel, 2023. "Uncertainty premia in REIT returns," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(2), pages 372-407, March.

    More about this item

    Keywords

    Macroeconomic uncertainty; Asset pricing; Risk factors; Return decomposition;
    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)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:171:y:2025:i:c:s0378426624002887. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.