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Cross-Category, Trans-Pacific Spillovers of Policy Uncertainty and Financial Market Volatility

Christopher Thiem

Open Economies Review, 2020, vol. 31, issue 2, No 8, 317-342

Abstract: Abstract Using generalised variance decompositions from vector autoregressions, we analyse cross-country, cross-category spillovers of economic policy uncertainty (EPU) and financial market volatility between the US and Japan. Our model includes indices of monetary, fiscal and trade policy uncertainty for each country, as well as three measures of option-implied stock market and exchange rate volatility, respectively. We find that the financial market volatility indices are usually substantial net spillover transmitters towards the total group of EPU measures. However, the Japanese equity and especially the FX volatility index are typically more affected by EPU spillovers than the US VXO. Our results also reveal that, compared to within-country spillovers, cross-country spillovers of EPU are relatively small and less volatile. Finally, we show that the direction of net EPU spillovers between the US and Japan is both time- and category-dependent with different EPU categories acting as strong sources of uncertainty spillovers throughout the sample period.

Keywords: Economic policy uncertainty; Exchange rate volatility; Japan; Spillovers; Stock market volatility; United States; Vector autoregression (search for similar items in EconPapers)
JEL-codes: C32 D80 F42 G18 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Cross-category, trans-Pacific spillovers of policy uncertainty and financial market volatility (2018) Downloads
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DOI: 10.1007/s11079-019-09559-1

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