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

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

Research output: Contribution to journalArticleResearchpeer-review

38 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)471-489
Number of pages19
JournalJournal of Financial Economics
Volume126
Issue number3
DOIs
Publication statusPublished - 1 Dec 2017

Keywords

  • Cross-section of stock returns
  • Economic uncertainty
  • ICAPM
  • Return predictability
  • Uncertainty aversion

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