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The Role of Economic Uncertainty in UK Stock Returns

Author

Listed:
  • Jun Gao

    () (Cork University Business School and Centre for Investment Research, University College Cork, Cork T12YN60, Ireland)

  • Sheng Zhu

    () (Cork University Business School and Centre for Investment Research, University College Cork, Cork T12YN60, Ireland)

  • Niall O’Sullivan

    () (Cork University Business School and Centre for Investment Research, University College Cork, Cork T12YN60, Ireland)

  • Meadhbh Sherman

    () (Cork University Business School and Centre for Investment Research, University College Cork, Cork T12YN60, Ireland)

Abstract

We investigated the role of domestic and international economic uncertainty in the cross-sectional pricing of UK stocks. We considered a broad range of financial market variables in measuring financial conditions to obtain a better estimate of macroeconomic uncertainty compared to previous literature. In contrast to many earlier studies using conventional principal component analysis to estimate economic uncertainty, we constructed new economic activity and inflation uncertainty indices for the UK using a time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model. We then estimated stock sensitivity to a range of macroeconomic uncertainty indices and economic policy uncertainty indices. The evidence suggests that economic activity uncertainty and UK economic policy uncertainty have power in explaining the cross-section of UK stock returns, while UK inflation, EU economic policy and US economic policy uncertainty factors are not priced in stock returns for the UK.

Suggested Citation

  • Jun Gao & Sheng Zhu & Niall O’Sullivan & Meadhbh Sherman, 2019. "The Role of Economic Uncertainty in UK Stock Returns," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 12(1), pages 1-1, January.
  • Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:1:p:5-:d:194836
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Aviral Kumar Tiwari & Micheal Kofi Boachie & Rangan Gupta, 2019. "Network Analysis of Economic and Financial Uncertainties in Advanced Economies: Evidence from Graph-Theory," Working Papers 201982, University of Pretoria, Department of Economics.
    2. Helseth, Marius Aleksander Emblem & Krakstad, Svein Olav & Molnár, Peter & Norlin, Karl-Martin, 2020. "Can policy and financial risk predict stock markets?," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 701-719.
    3. Zhu, Sheng & Gao, Jun & Sherman, Meadhbh, 2020. "The role of future economic conditions in the cross-section of stock returns: Evidence from the US and UK," Research in International Business and Finance, Elsevier, vol. 52(C).

    More about this item

    Keywords

    stock pricing; UK stock market; economic uncertainty;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • E - Macroeconomics and Monetary Economics
    • F2 - International Economics - - International Factor Movements and International Business
    • F3 - International Economics - - International Finance
    • G - Financial Economics

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