The Impact Of Economic Uncertainty On Cross-sectional Returns Of Stock

3 Since Merton's(1973)seminal article indicates that in multi-period economy,investors have the incentive to hedge against the stochastic changes in future consumption and investment opportunity set.This means that the state variables related to changes in consumption and investment opportunities are priced in the capital market,so that the covariance of assets and these state variables will be correlated with the expected returns of assets.Macroeconomic variables are widely used as systemic risk factors because information about economic indicators can have a significant impact on expected returns through multiple channels.Therefore,if investors pursue opportunities brought by changes in the economic environment,this paper will mainly study whether the return on investment in risk assets(stocks)are influenced by their exposure to risks on the economic fundamentals.Firstly,this paper constructs the economic uncertainty index(UNC),which mainly includes the real economy uncertainty index(EU)and economic policy uncertainty index(EPU).The real economy uncertainty index is constructed by the conditional heteroscedasticity of macroeconomic variables,such as the growth rate of industrial added,inflation,risk premium of interest rate and term structure of interest rate.China's economic policy uncertainty index is a quantitative indicator reflecting the degree of economic policy uncertainty,citing data compiled by three scholars(Scott R.Baker ? Nick Bloom ? Steven J.Davis)from northwestern university,Stanford university and the university of Chicago.Then based on fama's(1992,2015)the multifactor pricing model,(1)to build the stock's UNC beta and construct portfolio,and to test whether UNC beta is explained by other characteristics variables of the stock.(2)in controlling the influence of other conventional cross-sectional predictors on the above grouping combinations,the bivariate portfolio grouping and fama-macbeth regression were used to test whether economic uncertainty had an impact on stock returns.(3)to test whether the economic uncertainty premium is priced,(4)to measure the UNC's sustainability and its premium time-varying.(5)finally the robustness test is conducted on the empirical results of the paper.The empirical results show that(1)the portfolio with high UNC beta was 0.18% higher average yield per month than the portfolio with lower UNC beta,and a significant in statistical sense.(2)In the control of conventional pricing factors,both the bivariate grouping and the fama-macbeth regression results showed that economic uncertainty had a positive impact on return of stock.(3)adding economic uncertainty premium(URP)to fama's three-factor model,the excess return of the portfolio can be better explained,indicating that economic uncertainty premium is involved in stock pricing.This paper has the following shortcomings: the uncertainty index constructed for the real economy is not comprehensive enough.When constructing the uncertainty index of the real economy,the selected indexes describing the macro economy are limited in number,which may not be able to comprehensively describe the macro economy operation state,resulting in the economic uncertainty index constructed is not accurate enough to fully reflect the actual economic state.When calculating the individual stocks UNC's beta which is only lagged 2 years of data,may affect the stability of the results of calculation.