Category-specific EPU indices, macroeconomic variables and stock market return predictability

Qing Zeng, Xinjie Lu, Dayong Dong and Pan Li

International Review of Financial Analysis, 2022, vol. 84, issue C

Abstract: This paper mainly investigates whether the category-specific EPU indices have predictability for stock market returns. Empirical results show that the content of category-specific EPU can significantly predict the stock market return, no matter the individual category-specific EPU index or the principal component of category-specific EPU indices. In addition, the information of category-specific EPU indices can also have higher economic gains than traditional macroeconomic variables, even considering the trading cost and different investor risk aversion coefficients. During different forecasting windows, multi-period forecast horizons and the COVID-19 pandemic, we find the information contained in category-specific EPU indices can have better performances than that of the macroeconomic variables. Our paper tries to provide new evidence for stock market returns based on category-specific EPU indices.

Keywords: Category-specific EPU indices; Macroeconomic variables; Stock market return predictability; Principal component method; COVID-19 pandemic (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:84:y:2022:i:c:s1057521922003039

DOI: 10.1016/j.irfa.2022.102353

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