Uncertainty and Downside Risk in International Stock Returns

Abstract

We conduct an international analysis of the cross-sectional risk premiums of uncertainty risk factors in addition to traditional risk factors. We consider the stock markets in five regions separately. Internationally, uncertainty has negative risk premiums which is similar to previous findings for the US. This implies that investors get lower returns for assets with high uncertainty betas. We further contribute with an analysis of downside uncertainty risk. Here, the downside uncertainty risk factor is high uncertainty which has additional risk premiums. We measure uncertainty by the logs of the local and US economic policy uncertainty indices.

Keywords: International stock returns; economic policy uncertainty; Fama- French factor models; downside risk

JEL Classification: G12; G15