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Can financial uncertainty forecast aggregate stock market returns?

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  • Ólan Henry
  • Semih Kerestecioglu
  • Sam Pybis

Abstract

We investigate the role of financial uncertainty in forecasting aggregate stock market returns. Our results suggest that financial uncertainty, along with its change, are more powerful predictors of excess US monthly stock market returns than 14 macroeconomic predictors commonly used in the literature. Financial uncertainty is shown to outperform short interest, which has been suggested to be the strongest known predictor of the equity risk premium. These results persist using robust econometric methods in‐sample, and when forecasting out‐of‐sample.

Suggested Citation

  • Ólan Henry & Semih Kerestecioglu & Sam Pybis, 2024. "Can financial uncertainty forecast aggregate stock market returns?," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 33(2), pages 91-111, May.
    • Handle: RePEc:wly:finmar:v:33:y:2024:i:2:p:91-111
    DOI: 10.1111/fmii.12187
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