Uncertainty about Future Economic Policy and Expected Stock Returns - International Evidence

55 Pages Posted: 23 Apr 2020

See all articles by Robert Heigermoser

Robert Heigermoser

Technische Universität München (TUM), Students; Technische Universität München (TUM) - Department of Financial Management and Capital Markets

Date Written: March 29, 2020

Abstract

I investigate the role of economic policy uncertainty (EPU), proxied by the news-based measure of Baker et al. (2016), in the cross-section of individual stock returns in 23 countries. I estimate a stock’s beta toward its country-specific EPU index (βEPU) and show that stocks in the lowest βEPU quintile generate about 4.6% higher annual returns compared to stocks in the highest βEPU quintile. My results complement the well-established literature on the distinction between uncertainty and risk, as they indicate that uncertainty-averse investors demand a premium for owning stocks with negative βEPU. Vice versa, investors are willing to pay higher prices for stocks with positive βEPU, as these stocks act as a hedge against high levels of EPU. My findings underpin the results of Brogaard and Detzel (2015), as I provide evidence in favor of EPU being an economically priced and distinct risk factor for equities on an international scale.

Keywords: Economic Policy Uncertainty, International Asset Pricing, ICAPM, Uncertainty Aversion

JEL Classification: G11, G12, G15

Suggested Citation

Heigermoser, Robert and Heigermoser, Robert, Uncertainty about Future Economic Policy and Expected Stock Returns - International Evidence (March 29, 2020). Available at SSRN: https://ssrn.com/abstract=3563556 or http://dx.doi.org/10.2139/ssrn.3563556

Robert Heigermoser (Contact Author)

Technische Universität München (TUM) - Department of Financial Management and Capital Markets ( email )

Munich, 80333
Germany

Technische Universität München (TUM), Students ( email )

Munich, 80333
Germany

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