Investor Sentiment and the Economic Policy Uncertainty Premium

Gilbert Nartea, Hengyu Bai and Ji Wu

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: Motivated by recent studies documenting an equity premium associated with economic policy uncertainty (EPU), we test the hypothesis that the EPU premium is stronger (weaker) following periods of low (high) investor sentiment. We estimate stock sensitivity to an economic policy uncertainty (EPU) index and show that stocks in the Australian equities market in the highest uncertainty beta tertile underperform stocks in the lowest tertile, similar to US stocks. However, we find that this negative uncertainty premium remains significant only following periods of low investor sentiment as it disappears following periods of high sentiment. Our results complement the US evidence in that uncertainty averse investors are willing to pay high prices for stocks with positive uncertainty beta and require extra compensation to hold stocks with negative beta, but only in low sentiment periods. These results are consistent with strong (weak) intertemporal hedging demand for positive EPU beta stocks in low (high) sentiment periods. It is also consistent with limited (full) participation of pessimistic investors and investors with high aversion to uncertainty in low (high) sentiment periods. Our results suggest that betting against EPU as a trading strategy would be relatively more profitable when executed during low sentiment periods.

Keywords: Economic policy uncertainty; Investor sentiment; Cross-sectional stock returns; Australian stock market (search for similar items in EconPapers)
JEL-codes: C13 E20 G11 G12 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2019-11-01
New Economics Papers: this item is included in nep-mac and nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://repec.canterbury.ac.nz/cbt/econwp/1914.pdf (application/pdf)

Related works:
Journal Article: Investor sentiment and the economic policy uncertainty premium (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:19/14

Access Statistics for this paper

More papers in Working Papers in Economics from University of Canterbury, Department of Economics and Finance Private Bag 4800, Christchurch, New Zealand. Contact information at EDIRC.
Bibliographic data for series maintained by Albert Yee ().