Does Economic Policy Uncertainty Predict Cryptocurrency Returns?

Muhammad Cheema, Kenneth R. Szulczyk and Elie Bouri

Chapter 11 in Digital Banking and Finance:A Handbook, 2025, pp 281-309 from World Scientific Publishing Co. Pte. Ltd.

Abstract: We examine whether the economic policy uncertainty (EPU) index can predict cryptocurrency returns in countries with the highest number of Bitcoin nodes, which include the US, Germany, France, the Netherlands, Singapore, Canada, the UK, China, Russia and Japan. To the extent that cryptocurrencies are a speculative asset, we hypothesize that an increase in EPU drives cryptocurrency prices below their fundamental values due to the flight-to-quality effect. Then, the prices subsequently undergo correction. Furthermore, we hypothesize that the EPU index predicts better in the long run than in the short run since mispricing takes time to correct. Consistent with our hypothesis, we find that EPU positively predicts cryptocurrency returns in the short run for subsequent 1-month returns and in the long run for subsequent 6- and 12-month returns. Thus, cryptocurrencies cannot act as a hedge or safe haven against other financial assets during uncertain times.

Keywords: FinTech; Digital Era; Financial Industry; Digital Technology; Digital Financial Industry; Digital Finance; Financial Inclusion; Bank Stability; Emerging Economies; Bibliometric Analysis; Digital Finance Revolution; Global Impacts; Digital Innovation; Insurance; Big Data Applications; Digital Assets in Disarray; Forecasting Bitcoin; Machine Learning Approach; Economic Policy Uncertainty; Cryptocurrency; Bank Shares; Digital Age; Corporate Governance; Risks; Rewards; Assets Tokenization; Future of Money; Central Bank Digital Currencies; Bank Innovation; Risk-Taking Perspective (search for similar items in EconPapers)
JEL-codes: G1 G2 G24 M41 O3 O32 O33 (search for similar items in EconPapers)
Date: 2025
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