Abstract
We investigate the role of financial uncertainty in forecasting aggregate stock market returns. Our results suggest that financial uncertainty, along with its change, are more powerful predictors of excess US monthly stock market returns than 14 macroeconomic predictors commonly used in the literature. Financial uncertainty is shown to outperform short interest, which has been suggested to be the strongest known predictor of the equity risk premium. These results persist using robust econometric methods in-sample, and when forecasting out-of-sample.
Original language | English |
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Journal | Financial Markets, Institutions & Instruments |
DOIs | |
Publication status | Accepted/In press - 12 Jan 2024 |
Keywords
- equity risk premium
- financial uncertainty
- predictive regression
- return predictability