The contribution of Economic Policy Uncertainty to the persistence of shocks to stock market volatility

Paraskevi Tzika () and Theologos Pantelidis
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Paraskevi Tzika: Department of Economics, University of Macedonia

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: This paper examines the contribution of Economic Policy Uncertainty (EPU) to the persistence of shocks to stock market volatility. The study applies an innovative approach that compares the half-life of a shock in the context of a bivariate V AR model that includes the volatility of stock returns and EPU, with the half-life of the equivalent univariate ARMA model for the stock return volatility. Based on daily data for the UK and the US, the empirical results corroborate that EPU contributes to the persistence of shocks to stock market volatility for both countries. This contribution is higher for the US, where 14.3% of the persistence of shocks to stock market volatility can be attributed to the EPU index.

Keywords: Economic Policy Uncertainty; Stock Market Volatility; Persistence; Half-Life (search for similar items in EconPapers)
JEL-codes: C22 C32 E44 (search for similar items in EconPapers)
Date: 2021-09, Revised 2021-09
New Economics Papers: this item is included in nep-cwa, nep-fmk, nep-mac and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:mcd:mcddps:2021_11

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