 Effects of economic policy uncertainty: A regime switching connectedness approachDonald Lien, Jiewen Zhang and Xiaojian Yu Economic Modelling, 2022, vol. 113, issue C Abstract: This paper investigates the impact of economic policy uncertainty (EPU) in the US and China on international financial markets across different states. Although earlier studies have examined the interactions between EPUs and financial markets, few considered the issue from the state-dependence perspective. To fill this gap, we extend the Diebold and Yilmaz connectedness to the two-state Markov Switching Vector Autoregressive model to conduct the empirical analysis. Empirical results indicate connectedness is larger (smaller) in the high (low) volatility state than in the single-state model. Moreover, the two EPUs play distinct roles at different time scales. On the weekly time scale, EPUs are influenced by the financial markets only in the low volatility state while the China EPU becomes a net information sender in the high volatility state. Our findings imply that more attention should be devoted to the possible negative impact of China EPU. Keywords: Dynamic connectedness; Markov switching vector autoregressive model; High/low volatility state; Economic policy uncertainty (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:113:y:2022:i:c:s0264999322001250 DOI: 10.1016/j.econmod.2022.105879 Access Statistics for this article Economic Modelling is currently edited by S. Hall and P. Pauly More articles in Economic Modelling from Elsevier |
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