On economic uncertainty, stock market predictability and nonlinear spillover effects
Stelios Bekiros (),
Rangan Gupta () and
The North American Journal of Economics and Finance, 2016, vol. 36, issue C, 184-191
This paper uses a k-th order nonparametric Granger causality test to analyze whether firm-level, economic policy and macroeconomic uncertainty indicators predict movements in real stock returns and their volatility. Linear Granger causality tests show that whilst economic policy and macroeconomic uncertainty indices can predict stock returns, firm-level uncertainty measures possess no predictability. However, given the existence of structural breaks and inherent nonlinearities in the series, we employ a nonparametric causality methodology, as linear modeling leads to misspecifications thus the results cannot be considered reliable. The nonparametric test reveals that in fact no predictability can be observed for the various measures of uncertainty i.e., firm-level, macroeconomic and economic policy uncertainty, vis-à-vis real stock returns. In turn, a profound causal predictability is demonstrated for the volatility series, with the exception of firm-level uncertainty. Overall our results not only emphasize the role of economic and firm-level uncertainty measures in predicting the volatility of stock returns, but also presage against using linear models which are likely to suffer from misspecification in the presence of parameter instability and nonlinear spillover effects.
Keywords: Economic policy; Stock markets; Nonlinear causality (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (16) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: On Economic Uncertainty, Stock Market Predictability and Nonlinear Spillover Effects (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:36:y:2016:i:c:p:184-191
Access Statistics for this article
The North American Journal of Economics and Finance is currently edited by Hamid Beladi
More articles in The North American Journal of Economics and Finance from Elsevier
Series data maintained by Dana Niculescu ().