The Causal Relationship Between Economic Policy Uncertainty and Stock Returns in China and India: Evidence from a Bootstrap Rolling Window Approach

Xiao-lin Li, Mehmet Balcilar, Rangan Gupta and Tsangyao Chang

Emerging Markets Finance and Trade, 2016, vol. 52, issue 3, 674-689

Abstract: This article applies a bootstrap rolling-window causality test to assess the causal relationship between economic policy uncertainty (EPU) and stock returns in China and India. Empirical literature examining causality between two time series may suffer from inaccurate results when the underlying full-sample time series have structural changes. However, the bootstrap rolling-window approach enables us to identify possible time-varying causalities between time series based on sub-sample data. Using a twenty-four-months rolling window over the period 1995:02 to 2013:02 in China and 2003:02–2013:02 in India, we do find that there are bidirectional causal relationships between EPU and stock returns in several sub-periods rather than in the whole sample period. However, the association between EPU and stock returns is, in general, weak for these two emerging countries. Our findings have important implications for policy makers and investors.

Date: 2016
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Working Paper: The Causal Relationship between Economic Policy Uncertainty and Stock Returns in China and India: Evidence from a Bootstrap Rolling-Window Approach (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:52:y:2016:i:3:p:674-689

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DOI: 10.1080/1540496X.2014.998564

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