Forecasted Unemployment and the Cross-Section of Stock Returns

We introduce forecasted unemployment as a state variable that forecasts future macroeconomic activity. Hence, forecasted unemployment is expected to be priced in the cross-section of stock returns. Consistently, we quantify stock exposure to forecasted unemployment and document the importance of unemployment beta in the pricing of individual stocks. Stocks in the lowest unemployment beta decile generate 7% more annualized risk-adjusted return than stocks in the highest unemployment beta decile. The unemployment premium is driven by the outperformance (underperformance) by stocks with negative (positive) unemployment beta. The premium is robust to controls for firm-specific characteristics, risk factors, macroeconomic and financial variables