Misery on main street, victory on wall street: economic discomfort and the cross-section of global stock returns

We hypothesize that local economic discomfort influences investors' risk aversion, leading to crosssectional variation in risk premia in segmented equity markets. To test this assertion, we employ the misery index (MI)-which aggregates both unemployment and inflation rates-as a gauge of macroeconomic welfare. Using six decades of data from 69 markets, we demonstrate that economic discomfort reliably predicts cross-sectional stock returns. A quartile of countries with the highest MI outperforms those with the lowest by 0.74% per month. The effect prevails in markets where prices are set locally and gradually declines over time as markets become more integrated. (c) 2023 Elsevier B.V. All rights reserved.