Economic Policy Uncertainty and Momentum
41 Pages Posted: 4 Mar 2018 Last revised: 14 May 2019
Date Written: May 9, 2019
We show that a news-based measure of economic policy uncertainty (EPU) negatively forecasts 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. Overall, our findings suggest that EPU is an important determinant of time-series variation in momentum.
Keywords: Economic Policy Uncertainty, Time-Series Variation of Momentum, Fund-Flow-Induced Trading
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation