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Is Economic Uncertainty Priced in the Cross-Section of Stock Returns?

51 Pages Posted: 9 Dec 2016 Last revised: 10 Dec 2016

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business

Yi Tang

Fordham University - Gabelli School of Business

Date Written: December 1, 2016

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.

Keywords: Economic uncertainty, uncertainty aversion, cross-section of stock returns, ICAPM, return predictability.

JEL Classification: G11, G12, C13, E20, E30.

Suggested Citation

Bali, Turan G. and Brown, Stephen and Tang, Yi, Is Economic Uncertainty Priced in the Cross-Section of Stock Returns? (December 1, 2016). Georgetown McDonough School of Business Research Paper No. 2812967; Gabelli School of Business, Fordham University Research Paper No. 2812967. Available at SSRN: https://ssrn.com/abstract=2812967 or http://dx.doi.org/10.2139/ssrn.2812967

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Stephen Brown

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street
New York, NY NY 10012
United States

Yi Tang

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

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