Misery on Main Street, victory on Wall Street: Economic discomfort and the cross-section of global stock returns

Abstract

We hypothesize that local economic discomfort influences investors’ risk aversion, leading to cross-sectional variation in risk premia in segmented equity markets. To test this assertion, we employ the misery index (MI)—which aggregates both unemployment and inflation rates—as a gauge of macroeconomic welfare. Using six decades of data from 69 markets, we demonstrate that economic discomfort reliably predicts cross-sectional stock returns. A quartile of countries with the highest MI outperforms those with the lowest by 0.74% per month. The effect prevails in markets where prices are set locally and gradually declines over time as markets become more integrated.