The Impulse Response Function of Economic Policy Uncertainty and Stock Market Returns: A Look at the Eurozone

Journal of International Finance Studies, 12(3), 100-105, June 2012

10 Pages Posted: 21 Jun 2012 Last revised: 14 Jul 2013

Vichet Sum

University of Maryland Eastern Shore - School of Business and Technology

Date Written: June 21, 2012

Abstract

This paper examines the impulse response function of economic policy uncertainty (EPU) and stock market returns in the Eurozone. Using a vector autoregression analysis, this study explores how the Eurozone’s stock market responds to the impulse of economic policy uncertainty; a response feedback from the stock market is also examined. Using monthly data of the changes in economic policy uncertainty index and returns on the index of Eurozone stock market from 1993 to 2012, this study shows that Eurozone stock market returns respond positively to the changes in economic policy uncertainty; this response is statistically significant in the second, seventh and eighth months. However, the pooled OLS shows that the increase in the changes in economic policy uncertainty predicts lower stock market returns. The results also reveal a strong feedback from the stock market. The changes in economic policy uncertainty are significantly lower in the first, fourth and eighth months when the impulse is stock market returns.

Keywords: economic policy uncertainty, stock returns, Eurozone

JEL Classification: E60, G12, G14

Suggested Citation

Sum, Vichet, The Impulse Response Function of Economic Policy Uncertainty and Stock Market Returns: A Look at the Eurozone (June 21, 2012). Journal of International Finance Studies, 12(3), 100-105, June 2012. Available at SSRN: https://ssrn.com/abstract=2088700 or http://dx.doi.org/10.2139/ssrn.2088700

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

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