Examining the Relationship Between National Economic Policy Uncertainty and Stock Market Indices: An Empirical Analysis for Selected European Countries

Kubra Saka Ilgin ()
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Kubra Saka Ilgin: Erzincan Binali Yildirim Universitesi, Iktisadi ve Idari Bilimler Fakultesi Finans ve Bankacilik Bolumu, Erzincan, Türkiye

Journal of Economic Policy Researches, 2022, vol. 9, issue 2, 455-474

Abstract: The literature on economics and finance accepts uncertainty as an important factor affecting investor behavior. As a reflection of what is expected from countries’ economies, economic policy uncertainty indices were developed based on the USA economy and then were diversified for different countries and formed based on the news. Economic policy uncertainty can be a guide for stock market investors in estimating stock returns, in line with the effects cash flows have on stock returns. The aim of this study is to investigate the relationship between economic policy uncertainty and stock market indices. The study investigates the relationship between the data Europe’s leading stock markets indices and these countries’ national economic policy uncertainty indices within the scope of panel data analyses using the panel autoregressive distributed lag model/pooled mean group estimator (ARDL/PMG). The five European countries examined in this direction are; Germany, Italy, England, France, and Spain. A panel data-set was created using these countries’ national economic policy uncertainty indices for the December 2002-October 2021 period and benchmark stock market indices’ closing prices. According to the research results, significant short-term and long-term negative relationships have been determined to exist between the indices of Europe’s leading stock markets and the respective economic policy uncertainty indices for the whole panel. The short-term correlation coefficients per country; show a significant negative relationship to exist between economic policy uncertainty and stock market index prices for all examined countries. In line with the findings obtained from the study; the national economic policy uncertainty indices in European countries can be said to be leading indicators for guiding investors in estimating stock market returns.

Keywords: Uncertainty; Economic Policy Uncertainty; Stock Market Indices; European Stock Exchanges; Panel ARDL/PMG JEL Classification : D80; E66; G12 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:ist:iujepr:v:9:y:2022:i:2:p:455-474

DOI: 10.26650/JEPR1074582

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