Foreign economic policy uncertainty and U.S. equity returns

Mohammad Jahan-Parvar, Yuriy Kitsul, Jamil Rahman () and Beth Anne Wilson
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Yuriy Kitsul: https://www.federalreserve.gov/econres/yuriy-kitsul.htm
Beth Anne Wilson: https://www.federalreserve.gov/econres/beth-anne-wilson.htm

No 1401, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We document that foreign economic policy uncertainty (EPUF) has significant incremental predictive power for excess U.S. stock returns in the presence of domestic EPU, both in aggregate and for returns of portfolios constructed on firm characteristics, for 6 to 12-months-ahead horizons. We find that EPUF shocks primarily transmit to equity prices through cash flow news rather than the discount rate news channel. We examine whether responses of select macro-financial variables to an adverse EPUF shock are consistent with this transmission mechanism. Corporate investment outlays, payouts, and aggregate credit demand decline in response to such a shock.

Keywords: Economic policy uncertainty; Cash flows; Discount rates; ICAPM, Return predictability; Transmission channels (search for similar items in EconPapers)
JEL-codes: C13 E20 E30 G11 G12 (search for similar items in EconPapers)
Date: 2024-12-03
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1401

DOI: 10.17016/IFDP.2024.1401

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