Role of Economic Policy Uncertainty in the Connectedness of Cross-Country Stock Market Volatilities

Mudassar Hasan, Muhammad Abubakr Naeem, Muhammad Arif, Syed Jawad Hussain Shahzad and Safwan Mohd Nor
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Mudassar Hasan: Lahore Business School, The University of Lahore, Lahore 54000, Pakistan
Muhammad Abubakr Naeem: School of Economics and Finance, Massey University, Palmerston North 4442, New Zealand
Muhammad Arif: Department of Business Administration, Shaheed Benazir Bhutto University, Shaheed Benazirabad 67450, Pakistan
Safwan Mohd Nor: Faculty of Business, Economics and Social Development, University of Malaysia Terengganu, Kuala Nerus 21030, Terengganu, Malaysia

Mathematics, 2020, vol. 8, issue 11, 1-17

Abstract: The implied volatility index is a forward-looking indicator of fear among stock market participants. We examine the extent to which the connectedness of fear among global stock markets is driven by the cross-country connectedness of economic policy uncertainty (EPU). We use data on stock market fear and EPU indices for 13 countries, which spans from January 2011 to December 2018. To measure the connectedness among stock market fear and EPU of our sample countries, we employ two connectedness models. A cross-sectional regression model is further employed to ascertain the extent to which EPU connectedness between two countries explains the connectedness of fear between their stock markets, while controlling for bilateral linkage and country-specific factors. We find that EPU connectedness between any two partner countries significantly drives the connectedness of fear between their stock markets. The driving potential not only holds for short- and long-term connectedness, but also after controlling for bilateral linkages (bilateral trade, geographical distance, common language) and country-specific (trade and financial openness of the transmitter country) factors indicating robustness in our results.

Keywords: fear connectedness; economic policy uncertainty; stock markets; bilateral linkages (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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