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Long-Run Relation and Speed of Adjustment of Economic Policy Uncertainty and Excess Return Volatility

International Research Journal of Finance and Economics, 102, 6-12

14 Pages Posted: 19 Jun 2012 Last revised: 30 Dec 2012

Vichet Sum

University of Maryland Eastern Shore - School of Business and Technology

Fassil Fanta

University of Wisconsin - Stout

Date Written: June 18, 2012

Abstract

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.

Keywords: economic policy uncertainty, excess return volatility

JEL Classification: E60, G12, G14

Suggested Citation

Sum, Vichet and Fanta, Fassil, Long-Run Relation and Speed of Adjustment of Economic Policy Uncertainty and Excess Return Volatility (June 18, 2012). International Research Journal of Finance and Economics, 102, 6-12. Available at SSRN: https://ssrn.com/abstract=2087195 or http://dx.doi.org/10.2139/ssrn.2087195

Vichet Sum (Contact Author)

University of Maryland Eastern Shore - School of Business and Technology ( email )

2105 Kiah Hall
Princess Anne, MD 21853
United States
410-651-6531 (Phone)
410-651-6529 (Fax)

HOME PAGE: http://www.umes.edu/bma/Sum.html

Fassil Fanta

University of Wisconsin - Stout ( email )

Menomonie , WI 54751
United States

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