The Impact of Economic Policy Uncertainty on Stock Prices

Abstract

This study employs a panel local projections (LP) model to analyze the influence of economic policy uncertainty (EPU) on real equity returns based on thirteen economies, collectively accounting for 77.4% of global output. Utilizing both linear and non-linear LP models, we demonstrate that EPU exerts a negative impact on real equity returns. Moreover, the non-linear LP model reveals that uncertainty amplifies real equity return losses, particularly during non-expansionary periods, where the impact is twice as high on impact and exhibits greater persistence. These findings offer valuable insights for policymakers and investors.

Keywords: Equity Prices, Linear and Nonlinear Local Projections, and Economic Policy Uncertainty.