Stock Returns and Macroeconomic Uncertainty

Abstract

This paper provides a comprehensive review of various measures of uncertainty andtheir asset pricing implications in the cross-section of U.S. stock returns. With a focuson survey-based uncertainty, we add to the list of uncertainty measures previouslystudied in the literature with novel measures of forecast disagreement sourced from threeprofessional forecast datasets. Through portfolio analyses and stock-level cross-sectionalregressions over the sample period between 1989 and 2020, we observe that exposure touncertainty can explain a significant portion of the cross-sectional dispersion in futurestock returns. For survey-based uncertainty, the negative relation between uncertaintyand future returns persists over long-term investment horizons, extending up to 36months, and cannot be explained by the well-established return-predicting factors. Oursubsample analysis also reveals that for the uncertainty measures heavily dependent onmacroeconomic data, the return predictive power of uncertainty is significantly moreprominent in the later subperiod.

Keywords: Macroeconomic uncertainty, Cross section stock returns, Forecast disagreement, economic policy uncertainty