Uncertainty about Future Economic Policy and Expected Stock Returns - International Evidence
55 Pages Posted: 23 Apr 2020
Date Written: March 29, 2020
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: Suggested Citation