Policy Uncertainty in Australian Financial Markets

35 Pages Posted: 5 Sep 2020 Last revised: 29 Oct 2020

See all articles by Lee A. Smales

Lee A. Smales

University of Western Australia

Date Written: January 20, 2020


Economic policy touches most facets of corporate decision-making and variations in policy can elicit significant changes in financial performance and asset prices. We utilise the EPU measure of Baker et al. (2016) to investigate the extent to which policy uncertainty influences Australian financial market returns. Our empirical results demonstrate that both domestic and global uncertainty have a significant negative impact on excess stock returns, changes in bond yields and AUD returns. The relationship is concentrated in the left tail of the return distribution and largely driven by increases in policy uncertainty. Although the identified relationship is negative throughout the sample period, the magnitude of the relationship appears to be state dependent and is influenced by periods of high uncertainty, recession, and the lead-up to federal elections. The most plausible explanation for our results is that uncertainty about economic policy is channelled to financial markets via the discount rate effect, resulting in a higher risk premium. Our results are important for investors, corporate managers, and policy makers wishing to navigate periods of policy uncertainty.

Keywords: Economic Policy Uncertainty, Australian Financial Markets, Stock Markets, Bond Yields, Political uncertainty

JEL Classification: G10, G12, G14, G15

Suggested Citation

Smales, Lee A., Policy Uncertainty in Australian Financial Markets (January 20, 2020). Australian Journal of Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3632145 or http://dx.doi.org/10.2139/ssrn.3632145

Lee A. Smales (Contact Author)

University of Western Australia ( email )

UWA Business School
35 Stirling Highway
Perth, Western Australia 6009

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics