Is Macroeconomic Uncertainty or Policy Uncertainty Priced in UK Stock Returns?

We investigate the role of economic uncertainty in the cross-sectional pricing of UK stocks. Furthermore, we consider a broader range of financial market variables in measuring financial conditions in order to obtain a better... [ view full abstract ]

We investigate the role of economic uncertainty in the cross-sectional pricing of UK stocks. Furthermore, we consider a broader range of financial market variables in measuring financial conditions in order to obtain a better estimate of macroeconomic uncertainty. In contrast to many earlier studies using the conventional principal component analysis, we construct economic activity and inflation uncertainty indices for the UK using a time-varying parameter factor-augmented vector autoregressive (TVP-FAVAR) model. We then estimate stock exposure to a range of macroeconomic uncertainty indices and economic policy uncertainty indices. The evidence suggests that the economic activity uncertainty and the UK economic policy uncertainty have real power in explaining the cross-section of UK stock returns, while the inflation, EU economic policy and US economic policy uncertainty factors are not priced in stock returns for the UK.