Economic Policy Uncertainty and Momentum

41 Pages Posted: 4 Mar 2018 Last revised: 14 May 2019

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 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

Gu, Ming and Sun, Minxing and Wu, Yangru and Xu, Weike, Economic Policy Uncertainty and Momentum (May 9, 2019). 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

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