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
Date Written: June 18, 2012
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: Suggested Citation