International Review of Applied Financial Issues and Economics, Forthcoming
8 Pages Posted: 3 Jun 2012 Last revised: 17 Sep 2013
Date Written: June 2, 2012
This paper investigates how stock market returns respond to economic policy uncertainty shocks. Based on the vector autoregression (VAR) analysis of the monthly changes in economic policy uncertainty index in the United States and CRSP value-weighted index from 1985:M2 to 2012:M6, the results show that stock returns negatively respond to economic policy uncertainty shocks in the first, fourth, fifth, eighth, night, tenth and eleventh months. In addition, the results from Granger causality Wald tests show that economic policy uncertainty is helping in predicting stock returns. Finally, the results from the time-varying OLS regression also show that changes in economic policy uncertainty index predict negative stock returns.
Keywords: economic policy uncertainty, stock returns, VAR
JEL Classification: E60, G12, G14
Suggested Citation: Suggested Citation
Sum, Vichet, Economic Policy Uncertainty and Stock Market Returns (June 2, 2012). International Review of Applied Financial Issues and Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2073184 or http://dx.doi.org/10.2139/ssrn.2073184