Cross-Sectional Dispersion in Economic Forecasts and Expected Stock Returns

Abstract

This paper introduces a broad index of macroeconomic uncertainty based on the ex-ante measures of cross-sectional dispersion in economic forecasts by the Survey of Professional Forecasters. We estimate individual stock exposures to a newly proposed measure of economic uncertainty index and find that the resulting uncertainty beta predicts a significant proportion of the cross-sectional dispersion in stock returns. After controlling for a large set of stock characteristics and risk factors, we find the predicted negative relation between uncertainty beta and future stock returns remains economically and statistically significant. The significantly negative uncertainty premium is robust to alternative measures of uncertainty index and distinct from the negative market volatility risk premium identified by earlier studies. This draft: December 2014 JEL classification: G11, G12, C13, E20, E30.