Economic policy uncertainty and short-term reversals

Zhaobo Zhu () and Licheng Sun
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Zhaobo Zhu: Audencia Business School
Licheng Sun: Old Dominion University, Strome College of Business

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Abstract: In this article, we provide new evidence on the impact of economic policy uncertainty (EPU) on asset pricing. Specifically, we find that short-term return reversals are stronger following high-EPU periods, likely due to an uncertainty-induced decrease in stock market liquidity. However, EPU does not appear to have a significant effect on accounting-based anomalies, possibly because these anomalies are not driven by stock illiquidity. Our findings suggest that EPU affects short-term asset prices mainly through stock liquidity. However, EPU may contain incremental information beyond stock liquidity. Moreover, the arrival of the latest fundamental information could significantly mitigate the effect of EPU on short-term reversals.

Keywords: Economic Policy Uncertainty; Short-Term Reversals; Illiquidity (search for similar items in EconPapers)
Date: 2024-09-06
New Economics Papers: this item is included in nep-ipr
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Published in Journal of Financial Research, 2024, 47 (3), pp.877-899

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