Economic Policy Uncertainty and Long-Run Stock Market Volatility and Correlation

Hossein Asgharian, Charlotte Christiansen and Ai Jun Hou ()
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Ai Jun Hou: Stockholm Business School, Postal: Stockholm Business School, Stockholm University, SE-106 91 Stockholm, Sweden

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We use Baker, Bloom, and Davis’s (2016) economic policy uncertainty indices in combination with the mixed data sampling (MIDAS) approach to investigate long-run stock market volatility and correlation, primarily for the US and UK. Long-run US–UK stock market correlation depends positively on US economic policy uncertainty shocks. The dependence is asymmetric, with only positive shocks - increasing uncertainty - being of importance. The US long-run stock market volatility depends significantly on US economic policy uncertainty shocks but not on UK shocks, while the UK long-run stock market volatility depends significantly on both. Allowing for US economic policy uncertainty shocks improves the out-of-sample forecasting of US–UK stock market correlation and enhances portfolio performance. Similar results apply to the long-run correlation between the US and Canada, China, and Germany.

Keywords: economic policy uncertainty index; mixed data sampling; stock market correlation; stock market volatility; asymmetry (search for similar items in EconPapers)
JEL-codes: C32 G11 G15 G30 (search for similar items in EconPapers)
Pages: 34
Date: 2017-03-28
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