Economic Policy Uncertainty and Momentum

Financial Management, Forthcoming

52 Pages Posted: 4 Mar 2018 Last revised: 9 Jul 2020

See all articles by Ming Gu

Ming Gu

Xiamen University - School of Economics

Minxing Sun

Clemson University - Department of Finance

Yangru Wu

Rutgers University, Newark - School of Business - Department of Finance & Economics

Weike Xu

Clemson University - Department of Finance

Date Written: May 9, 2019

Abstract

We find that news-based measures of economic policy uncertainty (EPU) negatively forecast momentum. A one standard deviation increase in EPU is associated with a 1.11% decrease in risk-adjusted momentum returns. The predictive power of EPU is robust after controlling for previously documented economic state variables and macroeconomic uncertainty. We provide an explanation for these results from the perspective of a fund flow induced trading mechanism and offer direct empirical support. The literature documents that momentum can be partially attributed to performance chasing mutual fund flows. This flow induced mechanism functions more effectively in low EPU states generating stronger stock momentum.

Keywords: Economic Policy Uncertainty, Time-Series Variation of Momentum, Fund-Flow-Induced Trading

JEL Classification: G12, G14, G23

Suggested Citation

Gu, Ming and Sun, Minxing and Wu, Yangru and Xu, Weike, Economic Policy Uncertainty and Momentum (May 9, 2019). Financial Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3133832 or http://dx.doi.org/10.2139/ssrn.3133832

Ming Gu

Xiamen University - School of Economics ( email )

Xiamen, Fujian
China

Minxing Sun

Clemson University - Department of Finance ( email )

Clemson, SC 29634
United States

Yangru Wu (Contact Author)

Rutgers University, Newark - School of Business - Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-1146 (Phone)
973-353-1006 (Fax)

HOME PAGE: http://andromeda.rutgers.edu/~yangruwu

Weike Xu

Clemson University - Department of Finance ( email )

425 Sirrine Hall
Clemson, SC 29634
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
201
Abstract Views
1,154
rank
170,970
PlumX Metrics