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

Nusret Cakici and Adam Zaremba

Journal of Banking & Finance, 2023, vol. 149, issue C

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.

Keywords: Equity indices; International markets; Asset pricing; Equity anomalies; Return predictability; The cross-section of stock returns; The misery index; Inflation; Unemployment; Market segmentation (search for similar items in EconPapers)
JEL-codes: E24 E3 G11 G12 G14 G15 I31 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:149:y:2023:i:c:s0378426623000043

DOI: 10.1016/j.jbankfin.2023.106760

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