Global Bad and Good Uncertainties and Their Impact on Macro Aggregates and Stock Returns

Abstract

This paper estimates global bad and good uncertainties from monthly data on industrial production from a large set of countries. Bad and good uncertainties have opposite effects on macro aggregates and stock returns. An increase in bad uncertainty adversely impacts both, while an increase in good uncertainty has positive effects. This holds for many considered countries. Furthermore, global uncertainties help to explain stock returns in the cross-section. The pricing performance of the global CAPM and two-factor model of Fama and French (1998) always improve if the pricing factors are scaled with global uncertainties. Bad uncertainty is important in conomic distress times. In contrast, good uncertainty helps to explain returns in calm times. Overall, the results highlight the opposite effect of bad and good uncertainty and show that both are key drivers of real economies and financial markets.