Global Economic Uncertainty and the U.S. Equity Returns

Abstract

We document the predictive ability and economic significance of global economic policy uncertainty for U.S. equity returns. After orthogonalizing global economic policy uncertainty (global EPU) with respect to the U.S. EPU, we find that it has significant predictive power for aggregate stock returns and returns of portfolios constructed on size, investment, capital expenditure, and foreign sales in 6 to 12-months ahead horizons. For individual companies, we show that global EPU commands an economically significant and negative-valued premium in the cross-section of returns. The stocks of firms that are highly sensitive to global EPU, whether positive or negative, outperform those that are less sensitive to this measure.