Macroeconomic Disagreement and International Stock Return Predictability

Abstract

This paper examines the implications of US macroeconomic disagreement for international
asset pricing. We construct a US macroeconomic disagreement index based on survey
expectations among household investors and the Partial Least Square method. This index is
a powerful positive predictor of stock market returns around the globe, both in- and out-ofsample. Additionally, the effect of the index is driven by global common information.
Furthermore, the positive disagreement-stock return relation is consistent with the theory of
Atmaz and Basak (2018).

Keywords: Macroeconomic disagreement; Expectations; Household belief dispersion; International stock markets; Return predictability; Partial Least Square

JEL Classification: G12, G15