High policy uncertainty and low implied market volatility: An academic puzzle?

Jędrzej Białkowski, Huong Dieu Dang and Xiaopeng Wei

Journal of Financial Economics, 2022, vol. 143, issue 3, 1185-1208

Abstract: Motivated by the extremely low level of the CBOE VIX accompanied by the high level of U.S. economic policy uncertainty in the period of late 2016 to the end of 2017, we examine the factors affecting the relationship between market volatility and economic policy uncertainty in the United States and the United Kingdom. Our analysis shows that low-quality political signals, higher opinion divergence among investors, and exceptional equity market performance consistently weaken the positive relationship between implied market volatility and policy uncertainty. Our findings help to explain the divergence between the market volatility index and economic policy uncertainty post the 2016 U.S. presidential election and the UK Brexit referendum.

Keywords: Market volatility; Economic policy uncertainty; Quality of political signals; Bullish market; Investors’ opinions (search for similar items in EconPapers)
JEL-codes: G12 G18 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:143:y:2022:i:3:p:1185-1208

DOI: 10.1016/j.jfineco.2021.05.011

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