Does economic policy uncertainty command a risk premium in the cross-section of US, European, and Japanese stock returns ? A linear asset pricing model approach.
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- The objective of this thesis is to determine if foreign, domestic, and global Economic Policy Uncertainty (EPU) as measured by the indices of Baker, Bloom, and Davis (2016) carries a risk premium in the cross-section of stock returns from three regions, namely the United States, Japan, and Europe. The Fama-Macbeth two-pass regression method is employed to calculate the risk premia, with the five Fama-French factors and the Carhart momentum factor as control variables, on two sets of test assets, namely the 25 Fama-French portfolios sorted on size and book-to-market, as well as the 25 Fama-French portfolios sorted on size and prior returns. The main results find US EPU to be priced domestically in the US on the portfolios sorted on size and book-to-market, as well as European EPU to be priced in the US on the portfolios sorted on size and book-to-market.