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.
Accounting and Finance 2022 vol. 62 issue 3 3441-3474