A comprehensive investigation on the predictive power of economic policy uncertainty from non-U.S. countries for U.S. stock market returns

Yisu Huang, Feng Ma, Elie Bouri and Dengshi Huang

International Review of Financial Analysis, 2023, vol. 87, issue C

Abstract: This study uses economic policy uncertainty (EPU) indices for ten developed countries, three diffusion models, and five combination methods to forecast excess returns in the U.S. stock market. It shows empirically that, over the period January 1997 to January 2022, non-U.S. EPU indices have better predictive power for U.S. equity market excess returns than the U.S. EPU index itself. This illustrates how economic information from international markets can affect the U.S. stock market. This finding challenges the extensively recognized view that the U.S. is where important market signals are initially transmitted to other markets, suggesting that this belief is incomplete. Our outcomes are robust to a battery of tests covering model selection, model specification, forecast horizons, and the pandemic period, and their economic values are assessed. The findings are essential for the financial field to confront future fierce situations and crises.

Keywords: Stock return; Predictability; International EPU indices; Diffusion models (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:87:y:2023:i:c:s1057521923001722

DOI: 10.1016/j.irfa.2023.102656

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