Economic Policy Uncertainty Versus Sector Volatility: Evidence from India Using Multi-scale Wavelet Granger Causality Analysis

Abstract

The present study examines the relationship between Indian economic policy uncertainty (IEPU) and the different sector volatilities (SVs) of the Indian economy over the period 2006–2021. The relationship is studied using a multi-scale correlation framework, combining wavelet coherence analysis with the Granger causality test. The findings indicate a stronger relationship between the IEPU and SV for all sectors during COVID-19, primarily in the medium term. While IEPU led to SV during the global financial crisis (GFC), the SVs led to the IEPU during the COVID-19. However, the Granger causality test provides evidence that, in the long term, the SVs cause the IEPU while the IEPU leads to SV in the short term. The IT sector is crucial as its volatility leads to IEPU across all scales. These results have substantial implications for policymakers and portfolio managers. JEL Codes: G10, G17, G32

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“…Also, Sharma (2020) presents a commonality in volatility for Hong Kong, Japan, Russia, Singapore, and South Korea. Ambatipudi and Kumar (2022) find a strong medium-run relationship between economic policy uncertainty (EPU) and sectoral volatility in India, which sectoral volatility is a leading indicator of EPU during COVID-19. For European countries, Aslam et al (2021) demonstrate that volatility in equity markets spills over among 12 European countries, covering the entire European continent during the COVID-19 period by employing intraday data.…”

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“…Measures of economic policy uncertainty (EPU) are available for selected countries from policyuncertainty.com (Baker et al 2016). The EPU measure has been used in previous research primarily to explain stock market and sectoral volatility (Yuan et al 2022;Ziadat et al 2022;Belcaid and Ghini 2019;Ambatipudi and Kumar 2022). The measure reflects the relative frequency of the country's newspaper articles that contain terms about the economy, uncertainty, and policy-related difficulties.…”