Effect of Economic and Monetary Policy Uncertainty on stock markets. Evidence on return, volatility and liquidity

Jessica Paule-Vianez (), Raúl Gómez-Martínez () and Camilo Prado-Román ()
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Jessica Paule-Vianez: Universidad Rey Juan Carlos
Raúl Gómez-Martínez: Universidad Rey Juan Carlos
Camilo Prado-Román: Universidad Rey Juan Carlos
Authors registered in the RePEc Author Service: Camilo Prado-Roman ()

Economics Bulletin, 2020, vol. 40, issue 2, 1261-1271

Abstract: This paper studies the effect of Economic Policy Uncertainty (EPU) and Monetary Policy Uncertainty (MPU) on the return, volatility and liquidity of the stock markets. Taking the S&P 500 and NASDAQ 100 as reference, it is demonstrated how these uncertainties influence the return and volatility and, to a lesser extent, the liquidity of these indexes. It has been found that EPU have a greater effect on return and volatility during periods of recession, having only an effect on liquidity during periods of expansion. In contrast, MPU influences return and volatility more during periods of expansion, and liquidity only during periods of recession. These findings demonstrate the existence of behavioural biases consistent with Behavioural Finance, as well as the importance of controlling uncertainty on the part of economic policy makers to avoid the damages that EPU and MPU can generate in the stock markets.

Keywords: Economic Policy Uncertainty; Monetary Policy Uncertainty; Behavioural Finance; Stock markets; Economic cycles (search for similar items in EconPapers)
JEL-codes: D5 G1 (search for similar items in EconPapers)
Date: 2020-05-09
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