Cybercrime and the Cross-Section of Equity Returns

We use public news coverage about cybercrime to form a cybercrime news attention measure. This measure is consistent with the criteria for a state variable in ICAPM that is expected to forecasts economic conditions, thereby possessing the ability to predict cross-sectional equity returns. We estimate stock-level exposures to a tradeable cybercrime tracking factor. Stocks with the most positive sensitivities generate close to 10% lower annualized risk-adjusted returns than stocks with the most negative sensitivity. Our results indicate that risk-averse investors demand extra compensation to hold stocks with negative cybercrime beta and are willing to pay high prices for stocks with positive beta that hedge exposure to cybercrime. Though our main results are derived from a proprietary cybercrime series, we show that a particularly simple publicly-available alternative based on Google search trends yields very similar conclusions