The purpose of the proposed research is to investigate the role of economic uncertainty (e.g., due to unforeseen events like covid-19 or war) in the cross-sectional pricing of individual stocks and equity portfolios of the European market. The focus will be to estimate stock exposure to an economic uncertainty index and find out whether the highest uncertainty beta decile or lowest uncertainty beta decile generates a higher annualized risk-adjusted return. Furthermore, the research aims at identifying what drives the uncertainty premium and whether it’s because of risk-based or preference based or mispricing. Additionally, I am planning to show the impact of aggregate beta uncertainty on estimating future excess return in the selected market indices. The analysis is conducted using panel data from 17 developed markets in Europe (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland). The sample period is from January 1987 to December 2020 (might be extended to make it up to date during study time). Application of rolling regression of 60-month excess returns on economic uncertainty index based on each stock trading in FTSE Developed Europe Index will estimate uncertainty beta. Famous seven factors such as well-known market, size, momentum, investment, book-to-market, liquidity, and profitability will be used as the control variables. Analysis of bivariate portfolio sorts and re-examination of raw return and alpha differences will be performed to show whether beta uncertainty is the driving element for documented return differences rather than well-known stock characteristics or risk factors. Finally, investigation on whether results are driven by small, illiquid, and low-priced stocks, whether alternative measures of the uncertainty beta predict future market return, whether the findings are sensitive to alternative measures of the uncertainty index, and whether uncertainty premium for stocks in each of the ten industries based on four-digit SIC code is significant will be performed to prove the robustness of the analysis.

2024

2026