Economic Policy Uncertainty and Long-Run Stock Market Volatility and Correlation
Hossein Asgharian (),
Charlotte Christiansen and
Ai Jun Hou ()
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Hossein Asgharian: Lund University, Postal: Department of Economics, Lund University, Box 7082, 22007 Lund, Sweden
Ai Jun Hou: Stockholm Business School, Postal: Stockholm Business School, Stockholm University, SE-106 91 Stockholm, Sweden
CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
We use Baker, Bloom, and Davis’s (2016) economic policy uncertainty indices in combination with the mixed data sampling (MIDAS) approach to investigate long-run stock market volatility and correlation, primarily for the US and UK. Long-run US–UK stock market correlation depends positively on US economic policy uncertainty shocks. The dependence is asymmetric, with only positive shocks - increasing uncertainty - being of importance. The US long-run stock market volatility depends significantly on US economic policy uncertainty shocks but not on UK shocks, while the UK long-run stock market volatility depends significantly on both. Allowing for US economic policy uncertainty shocks improves the out-of-sample forecasting of US–UK stock market correlation and enhances portfolio performance. Similar results apply to the long-run correlation between the US and Canada, China, and Germany.
Keywords: economic policy uncertainty index; mixed data sampling; stock market correlation; stock market volatility; asymmetry (search for similar items in EconPapers)
JEL-codes: G11 G15 G30 C32 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2018-12
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