| Paper Number | KCB-WP-2013-032 |
|---|---|
| Title | Macroeconomic Uncertainty and Time-varying Short-horizon Return Predictability |
| Title(Other) | |
| Author | Deok Hyeon Lee ; Tong Suk Kim |
| Publisher | |
| Abstract | This paper shows that the macroeconomic uncertainty measured as a log of the cross-sectional standard deviation of forecasts about industrial production predicts the stock market. We show empirically that this macroeconomic uncertainty predicts the returns of the aggregate stock market as well as the decile portfolios of size, book-to-market and momentum positively during economic recessions, and its predictive power disappears during business cycle expansions. Also this predictor variable forecasts SMB and WML during recessions and HML during expansions, which implies that uncertainty about the fundamentals is related to the cyclical cross-sectional variations in the stock market. The overall evidence emphasizes the role of macroeconomic uncertainty risk in the financial market and delivers implications for the dynamics of countercyclical expected returns. |
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