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.

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.