Research on the Dynamic Interrelationship between Economic Policy Uncertainty and Stock Market Returns

Mingguo Zhao and Hail Park ()
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Mingguo Zhao: Department of International Business and Trade, Kyung Hee University, Seoul 02447, Republic of Korea
Hail Park: Department of International Business and Trade, Kyung Hee University, Seoul 02447, Republic of Korea

JRFM, 2024, vol. 17, issue 8, 1-17

Abstract: This paper employs the Panel Vector Autoregression (PVAR) method to examine the dynamic interrelationship between Economic Policy Uncertainty (EPU) and stock market returns. The existing literature has not reached a consensus on the relationship between EPU and stock market returns, and there is a lack of comparative analysis of domestic and foreign EPU. Therefore, this paper is the first to incorporate domestic and foreign EPU, stock market returns, and output into a unified framework, considering the dual impact of domestic and foreign EPU shocks. Additionally, the generalizability of the results is ensured by including a large sample of nine emerging and eleven advanced economies. The main findings are as follows: First, a positive shock to foreign EPU leads to a decline in stock market returns and is stronger than the impact of domestic EPU. Second, a positive shock to stock market returns reduces both domestic and foreign EPU. Third, a rise in stock market returns promotes domestic output growth, while increases in domestic and foreign EPU suppress domestic output growth. Finally, the United States is a net exporter of EPU rather than a net importer.

Keywords: stock market returns; Economic Policy Uncertainty; panel VAR (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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