Misery on Main Street, Victory on Wall Street: Economic Discomfort and the Cross-Section of Global Stock Returns

49 Pages Posted: 17 Dec 2020 Last revised: 20 Dec 2020

See all articles by Nusret Cakici

Nusret Cakici

Fordham University

Adam Zaremba

Poznań University of Economics and Business; Montpellier Business School

Date Written: November 14, 2020


This study argues that local economic discomfort influences investors’ risk-aversion, leading to a cross-sectional variation of equity risk premia around the world. To test this assertion, we use the popular Misery Index, which aggregates unemployment and inflation rates, as a gauge of macroeconomic welfare. Using data from 65 stock markets for the years 1960–2019, we demonstrate that economic discomfort reliably predicts future equity returns in the cross-section. A quartile of countries with the highest Misery Index outperform the countries with the lowest Misery Index by 0.65% per month. The phenomenon is not subsumed by a battery of established return predictors and proves robust to many additional checks. The effect is stronger in countries where prices are set primarily by local investors and where uncertainty avoidance is high. Finally, this economic discomfort premium can be successfully harvested with liquid exchange-traded funds.

Keywords: Equity Indices, International Markets, Asset Pricing, Equity Anomalies, Return Predictability, the Cross-Section of Stock Returns, the Misery Index, Economic Discomfort Index, Unemployment, Inflation

JEL Classification: G11, G12, G14, G15, E3, E24, I31

Suggested Citation

Cakici, Nusret and Zaremba, Adam, Misery on Main Street, Victory on Wall Street: Economic Discomfort and the Cross-Section of Global Stock Returns (November 14, 2020). Available at SSRN: https://ssrn.com/abstract=3730645 or http://dx.doi.org/10.2139/ssrn.3730645

Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)

Adam Zaremba (Contact Author)

Poznań University of Economics and Business ( email )

al. Niepodległości 10
Poznań, 61-875

HOME PAGE: http://adamzaremba.pl

Montpellier Business School ( email )

2300 Avenue des Moulins
Montpellier, Occitanie 34000

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