Asset Returns and Economic Uncertainty: A Cross-Country Analysis

Abstract

This paper examines the effects of economic uncertainty (idiosyncratic vis-à-vis common uncertainty) on equity, bond and housing returns across both developed and developing countries. Building on International/Intertemporal Capital Asset Pricing Model (ICAPM), we find that economic uncertainty exerts negative effects on equity, bond and housing returns. When we decompose economic uncertainty into two parts: idiosyncratic and common economic uncertainty, we find that ‘idiosyncratic uncertainty’ affects equity, bond and housing returns more negative and pronounced than ‘common’ uncertainty, where investors do not demonstrate differences in responses to the different dimensions of uncertainty. Moreover, there are weak lagged effects of economic uncertainty on asset returns. Additionally, we find negative uncertainty premium for equity more persistently in bullish rather than bearish market conditions. Our results are also robust for low frequency data and inclusion of covid period in the analysis. Our findings have implications for policy makers in both developed and emerging markets regarding clear communication of economic policies.

Keywords

• asset returns
• economic uncertainty
• cross-country analysis