How do economic policy uncertainties affect stock market volatility? Evidence from G7 countries

Abstract

This study explores the dynamic and frequency spillover characteristics between economic policy uncertainty (EPU) and stock market realized volatility (RV) in G7 countries. We apply the monthly data of country-specific economic policy uncertainty indices and realized volatility to calculate the directional spillover indicator. Then we use a Fourier transformation to calculate the frequency of spillovers to study the duration of the spillover effect. We find that the spillover effect of EPU on stock market volatility is relatively large in the U.S., Japan and Canada, and has certain regional similarities. EPU has longer spillover effects on the stock markets of France, Germany and Italy, which is strongest over 3-18 months. Finally, important economic events such as the financial crisis and the Brexit, increased EPU spillover level and lasting time. We provide the dynamic and frequency spillover characteristics between EPU and the stock market in G7 countries, making this study useful for international asset allocation and risk management.

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

“…As a result, firms might become more volatile, exacerbating market volatility. Many research examined the association between the EPU of the developed countries (e.g., the USA) and financial market volatility (Belcaid & El Ghini, 2019;Li et al, 2019;Ma et al, 2020). Some studies even established EPU's predictive power on volatility forecasts (Liu et al, 2017).…”

“…While most research has focused on the policy uncertainty-financial return comovements, few studies have examined the association between policy uncertainty and the financial market volatility (Belcaid & El Ghini, 2019;Li et al, 2019;Ma et al, 2020). All these studies looked at the impact of EPU on overall market volatility and did not study different sectors separately.…”

Efecto de la incertidumbre de política económica en los mercados bursátiles europeos

“…Li et al (2020) investigaron el impacto de IPE en la volatilidad del mercado de valores chino y encontraron, no sólo que IPE tiene un impacto significativo en la volatilidad de los mercados de valores, sino que, además, tanto incrementos como reducciones de IPE pueden generar una volatilidad sustancialmente alta en el mercado de valores de china. Ma et al (2020) exploran las características de desbordamiento dinámico entre IPE y la volatilidad de los mercados de valores en los países del G7 encontrando que el efecto de derrame de IPE sobre la volatilidad es relativamente grande en Estados Unidos, Japón y Canadá, mientras que IPE tiene efectos indirectos más prolongados en la volatilidad de los mercados de valores de Francia, Alemania e Italia.…”

Network Effects and Characteristics of Cross-Industrial Tail Risk Spillover in China

“…In addition, most of the existing studies [7,8] focus on measuring the intensity scale of risk spillover, that is, the level of network association. Scare attention is given to the direction and path of risk transmission and other association structures [9][10][11]. ere are very few studies [12,13] that consider both the level and structure of association and assess the contribution of risk in the tail risk network.…”