The role of economic uncertainty in UK stock returns
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Published Version
Date
2019
Authors
Gao, Jun
Zhu, Sheng
O'Sullivan, Niall
Sherman, Meadhbh
Journal Title
Journal ISSN
Volume Title
Publisher
MDPI
Published Version
Abstract
We investigated the role of domestic and international economic uncertainty in the cross-sectional pricing of UK stocks. We considered a broad range of financial market variables in measuring financial conditions to obtain a better estimate of macroeconomic uncertainty compared to previous literature. In contrast to many earlier studies using conventional principal component analysis to estimate economic uncertainty, we constructed new economic activity and inflation uncertainty indices for the UK using a time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model. We then estimated stock sensitivity to a range of macroeconomic uncertainty indices and economic policy uncertainty indices. The evidence suggests that economic activity uncertainty and UK economic policy uncertainty have power in explaining the cross-section of UK stock returns, while UK inflation, EU economic policy and US economic policy uncertainty factors are not priced in stock returns for the UK
Description
Keywords
Stock pricing , UK stock market , Economic uncertainty
Citation
Gao, J., Zhu, S., O’Sullivan, N. and Sherman, M., 2019. The Role of Economic Uncertainty in UK Stock Returns. Journal of Risk and Financial Management, 12(1), 5 (16pp.) DOI: 10.3390/jrfm12010005