Long-Run Relation and Speed of Adjustment of Economic Policy Uncertainty and Excess Return Volatility
University of Maryland Eastern Shore - School of Business and Technology
University of Wisconsin - Stout
June 18, 2012
International Research Journal of Finance and Economics, 102, 6-12
This study examines the relationship between excess return volatility and economic policy uncertainty in U.S using monthly data for the period 1985-2011. The result reveals the existence of a long-run positive relationship between excess return volatility and economic policy uncertainty. The casualty test indicates that economic policy uncertainty Granger-causes excess return volatility. The vector error correction model result shows that previous values of economic policy uncertainty explain the variation in the excess return volatility. Moreover, the deviation of excess return from its long-run equilibrium level by 1 unit, it will adjust back by 7.56 percent of the deviation after a month.
Number of Pages in PDF File: 14
Keywords: economic policy uncertainty, excess return volatility
JEL Classification: E60, G12, G14
Date posted: June 19, 2012 ; Last revised: December 30, 2012
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