Effects of Economic Policy Uncertainty Shocks on the Long-Run US-UK Stock Market Correlation

58 Pages Posted: 4 Oct 2016 Last revised: 29 Jun 2020

See all articles by Hossein Asgharian

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies

Charlotte Christiansen

Aarhus University - CREATES

Rangan Gupta

University of Pretoria - Department of Economics

Ai Jun Hou

Stockholm University

Date Written: October 3, 2016

Abstract

We study the impact of economic policy uncertainty (EPU) shocks on the long-run stock market variances and correlations, primarily for the US and the UK. We find that US EPU shocks affect both US and UK stock market long-run variances and correlation, but UK EPU shocks only affect its own long-run variance. The results are consistent when we include more countries in an international analysis. We demonstrate the practical importance of including EPU shocks in international portfolio analysis. A comparative analysis shows that EPU shocks convey important information about the long-run variances and correlation, even after accounting for a number of alternative uncertainty measures, and that it performs better out-of-sample than most of the alternative uncertainty measures.

Keywords: economic policy uncertainty index; mixed data sampling; stock market correlation; stock market volatility

JEL Classification: G11, G15, G30, C32

Suggested Citation

Asgharian, Hossein and Christiansen, Charlotte and Gupta, Rangan and Hou, Ai Jun, Effects of Economic Policy Uncertainty Shocks on the Long-Run US-UK Stock Market Correlation (October 3, 2016). Available at SSRN: https://ssrn.com/abstract=2846925 or http://dx.doi.org/10.2139/ssrn.2846925

Hossein Asgharian

Lund University - Department of Economics; Knut Wicksell Centre for Financial Studies ( email )

P.O. Box 7082
S-220 07 Lund
Sweden
046-222-86-87 (Phone)

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Rangan Gupta

University of Pretoria - Department of Economics ( email )

Lynnwood Road
Hillcrest
Pretoria, 0002
South Africa

Ai Jun Hou

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

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