Growth Expectations, Dispersion of Beliefs and the Cross-Section of Stock Returns

Abstract: The present study investigates whether the mean and the standard deviation of real GDP growth forecasts from the ECB Survey of Professional Forecasters (SPF) can help to explain the cross-sectional variation of expected returns in the German stock market. The expected real GDP growth from the SPF can be interpreted as a proxy for expected business conditions, whereas the cross-sectional dispersion of these expectations may serve as a proxy for macroeconomic uncertainty. I find support for the hypothesis that growth expectations and macroeconomic uncertainty are highly correlated and hence should be measured simultaneously to circumvent a potential omitted variable bias. The overall results of my asset-pricing tests provide more evidence for a premium associated with expected real GDP growth than for a premium on the macroeconomic uncertainty factor, however, the results are to some extent contradicting and might be influenced by multicollinearity.