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

University essay from Lunds universitet/Nationalekonomiska institutionen

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.

  AT THIS PAGE YOU CAN DOWNLOAD THE WHOLE ESSAY. (follow the link to the next page)