Economic policy uncertainty and industry return predictability – Evidence from the UK

Anna Golab, Deepa Bannigidadmath, Thach Ngoc Pham and Kannan Thuraisamy

International Review of Economics & Finance, 2022, vol. 82, issue C, 433-447

Abstract: This paper examines whether local, regional, and global policy uncertainty shocks predict the sector returns of the UK stock market. Consistent with the market integration literature, we find global policy uncertainty shock is the major predictor of sector returns. Our second contribution is that the predictability of returns is dependent on the state of the business cycle. Finally, the evidence of predictability is strongest at the 6-month horizon, revealing that the impact of policy uncertainty shocks lasts for a few months. Our findings hold even after controlling for well-known risk factors and different sub-samples of data.

Keywords: Industry return predictability; Policy uncertainty; Recession; Expansion; Risk factors (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:82:y:2022:i:c:p:433-447

DOI: 10.1016/j.iref.2022.07.006

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