Economic uncertainty and Australian stock returns

Motivated by the purportedly close relation between economic uncertainty and future stock returns in the US, we investigate the predictive role of this potential factor in the Australian stock market. Applying portfolio‐sorting strategies based on economic uncertainty exposure measured by individual stock betas, we find that uncertainty betas negatively relate to future stock returns over short‐ and medium‐term trading horizons. Moreover, common asset pricing models, including the capital asset pricing model (CAPM) and the Fama and French three‐, five‐, and six‐factor models, cannot explain these relations. The results remain robust when applying firm‐level Fama and MacBeth regressions.