Economic Concern and Equity Risk Premium: The Role of Sleeplessness

Abstract

This paper constructs a Sleeplessness Index (SI) based on the search volume of insomnia-related terms in the Baidu Index from January 2011 to December 2022. The empirical results show that the Sleeplessness Index has a strong negative effect on future stock returns. Further analysis of the economic mechanism behind this negative predictability reveals that the Sleeplessness Index serves as a leading indicator of macroeconomic conditions, suggesting that its impact on the stock market operates through an information reflection channel rather than as a sentiment indicator. Moreover, sleeplessness, often accompanied by concerns about economic conditions, increases risk aversion among investors, leading to lower net buying flows and, consequently, negative stock returns. Additionally, the Sleeplessness Index strongly predicts cross-sectional stock returns, especially for stocks with higher risk levels, intrinsic valuation challenges, or limited arbitrage opportunities. Further analysis demonstrates that province-level Sleeplessness Indexes in regions with higher insomnia rates and larger investor bases have greater predictive power for returns.

Keywords: Sleeplessness, Searching activity, Leading indicator, Risk aversion, Return predictability