The Role of Economic Uncertainty in UK Stock Returns

Forthcoming, Journal of Risk and Financial Management

30 Pages Posted: 8 Apr 2019

See all articles by Jun Gao

Jun Gao

University College Cork

Sheng Zhu

University College Cork - Cork University Business School; Boole Centre for Research in Informatics; Fexco Group; Central China Securities Co., Ltd

Niall O'Sullivan

University College Cork

Meadhbh Sherman

University College Cork

Date Written: March 19, 2019

Abstract

We investigate the role of domestic and international economic uncertainty in the cross-sectional pricing of UK stocks. We consider a broad range of financial market variables in measuring financial conditions in order 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 construct new economic activity and inflation uncertainty indices for the UK using a time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model. We then estimate 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.

Keywords: stock pricing, UK stock market, economic uncertainty

JEL Classification: G11, G12

Suggested Citation

Gao, Jun and Zhu, Sheng and O'Sullivan, Niall and Sherman, Meadhbh, The Role of Economic Uncertainty in UK Stock Returns (March 19, 2019). Forthcoming, Journal of Risk and Financial Management. Available at SSRN: https://ssrn.com/abstract=3355648 or http://dx.doi.org/10.2139/ssrn.3355648

Jun Gao

University College Cork ( email )

5 Bloomfield Terrace Western Road
Cork
Ireland

Sheng Zhu

University College Cork - Cork University Business School ( email )

West Wing, Main Quadrangle, College Road
Cork
Ireland

Boole Centre for Research in Informatics

Western Gateway Building
Western Road
Cork
Ireland

Fexco Group ( email )

Fexco Head Office
Iveragh Road
Killorglin, Kerry
Ireland

Central China Securities Co., Ltd ( email )

Shanghai
China

Niall O'Sullivan (Contact Author)

University College Cork ( email )

Department of Economics
University College Cork
Cork, n/a
Ireland

Meadhbh Sherman

University College Cork ( email )

Register to save articles to
your library

Register

Paper statistics

Downloads
10
Abstract Views
113
PlumX Metrics