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The Role of Domestic and Global Economic Policy Uncertainties in Predicting Stock Returns and their Volatility for Hong Kong, Malaysia and South Korea: Evidence from a Nonparametric Causality-in-Quantiles Approach

Mehmet Balcilar, Rangan Gupta, Won Joong Kim () and Clement Kyei
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Won Joong Kim: Department of Economics, Konkuk University, Seoul, Republic of Korea.

No 201586, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper analyses whether we can predict stock return and its volatility of Hong Kong, Malaysia and South Korea based on measures of domestic and global (China, the European Area, Japan, and the US) economic policy uncertainties (EPU). While, linear Granger causality tests fail to find evidence of predictability, barring the case of South Korean EPU predicting its own stock returns, when we use a nonparametric causality-in-quantiles test, strong evidence of causality is detected from the EPUs for stock return volatility of Malaysia, and both returns and volatility at certain parts of the conditional distributions for South Korea. There is no evidence of predictability from domestic and global EPUs for return and volatility of the Hong Kong stock market. Given the statistical evidence of nonlinearity in our data set, we consider the results from the nonparametric test as more robust relative to the standard linear causality test.

Keywords: Economic Policy Uncertainty; Stock Returns; Volatility; Linear Causality; Nonparametric Quantile Causality; Emerging Markets (search for similar items in EconPapers)
JEL-codes: C32 C53 E60 G12 G17 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2015-11
New Economics Papers: this item is included in nep-for, nep-mac and nep-sea
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