Influence of Local and Global Economic Policy Uncertainty on the volatility of US state-level equity returns: Evidence from a GARCH-MIDAS approach with Shrinkage and Cluster Analysis

V. Candila, Oguzhan Cepni, G. M. Gallo and Rangan Gupta

Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia

Abstract: This paper examines the influence of local (state-specific) and global Economic Policy Uncertainty (EPU) on the volatility of US state-level equity returns. We employ a GARCH-MIDAS approach that incorporates multiple EPU indices as low-frequency predictors of daily stock return volatility. To address the challenge of selecting the most relevant EPU indices, we utilize an Elastic Net (EN) shrinkage method to combine forecasts from different models. Our results reveal that the combined model, which leverages information from both local and global EPU indices, generally outperforms single specifications. Further, a cluster analysis based on the volatility forecasts uncovers distinct geographical patterns, suggesting that state-level volatility is influenced by both state-specific and nationwide policy uncertainties. These findings highlight the importance of considering both local and global economic policy uncertainty in understanding and predicting the volatility dynamics at the regional level.

Keywords: C32; C53; G10; G17; D80 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ure
References: Add references at CitEc
Citations:

Downloads: (external link)
https://crenos.unica.it/crenos/node/8852
https://crenos.unica.it/crenos/sites/default/files/wp-24-14.pdf (application/pdf)

Related works:
Working Paper: Influence of Local and Global Economic Policy Uncertainty on the Volatility of US State-Level Equity Returns: Evidence from a GARCH-MIDAS Approach with Shrinkage and Cluster Analysis (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cns:cnscwp:202414

Access Statistics for this paper

More papers in Working Paper CRENoS from Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia Contact information at EDIRC.
Bibliographic data for series maintained by CRENoS (webmaster@crenos.unica.it).