Effects of economic policy uncertainty: A regime switching connectedness approach
Jiewen Zhang and
Economic Modelling, 2022, vol. 113, issue C
This paper investigates the impact of economic policy uncertainty (EPU) in the US and China on international financial markets across different states. Although earlier studies have examined the interactions between EPUs and financial markets, few considered the issue from the state-dependence perspective. To fill this gap, we extend the Diebold and Yilmaz connectedness to the two-state Markov Switching Vector Autoregressive model to conduct the empirical analysis. Empirical results indicate connectedness is larger (smaller) in the high (low) volatility state than in the single-state model. Moreover, the two EPUs play distinct roles at different time scales. On the weekly time scale, EPUs are influenced by the financial markets only in the low volatility state while the China EPU becomes a net information sender in the high volatility state. Our findings imply that more attention should be devoted to the possible negative impact of China EPU.
Keywords: Dynamic connectedness; Markov switching vector autoregressive model; High/low volatility state; Economic policy uncertainty (search for similar items in EconPapers)
JEL-codes: C58 F36 G15 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:113:y:2022:i:c:s0264999322001250
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