Economic Policy Uncertainty and the Cost of Equity Capital

Journal of Financial Research

49 Pages Posted: 3 Dec 2023 Last revised: 21 Apr 2025

See all articles by Yizhi Wang

Yizhi Wang

Australian National University (ANU) - College of Business and Economics

Jingze Zhang

affiliation not provided to SSRN

Qiaoqiao Zhu

Australian National University (ANU) - College of Business and Economics; Financial Research Network (FIRN)

Date Written: March 19, 2025

Abstract

In this paper, we investigate the role of economic policy uncertainty (EPU) in the cost of equity capital. Our findings suggest that the relationship between EPU and the security market line varies cross-sectionally. Following periods of high EPU, the security market line tends to slope upward, whereas it exhibits a downward slope following periods of low EPU. In the time-series analysis, we observe that EPU significantly and positively affects the beta premium. Further evidence shows that investors may adjust their portfolios, shifting investments from higher-risk to lower-risk assets when confronted with high EPU.

Keywords: EPU, Market Beta, Beta Premium, Asset Allocation

Suggested Citation

Wang, Yizhi and Zhang, Jingze and Zhu, Qiaoqiao, Economic Policy Uncertainty and the Cost of Equity Capital (March 19, 2025). Journal of Financial Research, Available at SSRN: https://ssrn.com/abstract=4651815 or http://dx.doi.org/10.2139/ssrn.4651815

Yizhi Wang (Contact Author)

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia

Jingze Zhang

affiliation not provided to SSRN ( email )

No Address Available

Qiaoqiao Zhu

Australian National University (ANU) - College of Business and Economics ( email )

Canberra, Australian Capital Territory 2601
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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