Foreign Economic Policy Uncertainty and US Equity Returns
Mohammad R. Jahan-Parvar, Federal Reserve Board
This talk highlights how we document the predictive ability and economic significance of foreign economic policy uncertainty for US equity returns. After orthogonalizing global economic policy uncertainty (EPU) with respect to the US 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 when forecasting 6 to 12 months out. For individual companies, we show that foreign EPU commands an economically significant and negative-valued premium in the cross-section of returns. The stocks of firms that are highly sensitive to foreign EPU, whether positive or negative, outperform those that are less sensitive to this measure.
Published: 7 Nov 2023
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