Unemployment beta and the cross-section of stock returns: Evidence from Australia

Abstract

This study provides evidence of the significant impacts of unemployment indicators, including the projected unemployment rate and actual unemployment gap, on the cross-sectional stock returns in the Australian market. Utilising the extensive dataset of all listed stocks and unemployment data from 1992 to 2021, we construct an unemployment beta to measure the monthly-varying sensitivity of returns to the actual and forecasted unemployment levels. The findings confirm that stocks in the lowest unemployment beta decile can generate higher excess and risk-adjusted returns compared to the higher unemployment beta deciles. The predictive powers of unemployment remain significant within the horizon of 36 months for the aggregate returns and 24 months for cross-sectional returns. Further, the unemployment premiums are positively correlated with firms' operating leverage and economic, financial, and political uncertainties. After considering a battery of sensitivity analyses accounting for alternative approaches, risk, and macroeconomic indicators, our results remain robust.