Economic Policy Uncertainty and Momentum
Financial Management, Forthcoming
52 Pages Posted: 4 Mar 2018 Last revised: 9 Jul 2020
Date Written: May 9, 2019
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: Suggested Citation