High Policy Uncertainty and Low Implied Market Volatility – an Academic Puzzle?

52 Pages Posted: 22 Mar 2021

See all articles by Jedrzej Pawel Bialkowski

Jedrzej Pawel Bialkowski

University of Canterbury - Department of Economics and Finance

Huong D. Dang

University of Canterbury

Xiaopeng Wei

University of Canterbury

Abstract

Motivated by the extremely low level of the CBOE VIX accompanied by the high level of US economic policy uncertainty in the period of late 2016 to the end of 2017, we examine the factors affecting the relationship between market volatility and economic policy uncertainty in the United States and the United Kingdom. Our analysis shows that low-quality political signals, higher opinion divergence among investors, and exceptional equity market performance consistently weaken the positive relationship between implied market volatility and policy uncertainty. Our findings help to explain the divergence between the market volatility index and economic policy uncertainty post the 2016 US presidential election and the UK Brexit referendum.

Keywords: VIX, VTSE, Economic policy uncertainty, Baker-Bloom-Davis index, Quality of political signals, Investor sentiment, Bullish market, Investors’ opinions

JEL Classification: G11, G14, G23, G41

Suggested Citation

Bialkowski, Jedrzej Pawel and Dang, Huong D. and Wei, Xiaopeng, High Policy Uncertainty and Low Implied Market Volatility – an Academic Puzzle?. Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3809400

Jedrzej Pawel Bialkowski

University of Canterbury - Department of Economics and Finance ( email )

Private Bag 4800
Christchurch, 8140
New Zealand

Huong D. Dang

University of Canterbury ( email )

Private Bag 4800
Christchurch, 8140
New Zealand
+64 3 3694059 (Phone)
+64 (0)3 3642635 (Fax)

HOME PAGE: http://https://www.canterbury.ac.nz/business-and-law/contact-us/people/huong-dang.html

Xiaopeng Wei (Contact Author)

University of Canterbury ( email )

Ilam Road
Christchurch 8140
New Zealand

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