Policy Uncertainty and Household Stock Market Participation

Agarwal, Vikas; Aslan, Hadiye; Huang, Lixin; Ren, Honglin

doi:10.2139/ssrn.3068792

Cited by 10 publications

(12 citation statements)

References 54 publications

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“…Thus, investors are less likely to move their investments to winning funds when uncertainty is high. In addition, Agarwal, Aslan, Huang, and Ren (2018) find that investors may reduce their participation in the stock market during high‐EPU periods. Therefore, when EPU is low, the flow‐based mechanism leads winning funds to continue investing in winner stocks and losing funds to liquidate their holdings in loser stocks, thereby generating momentum.…”

Section: A Fund Flow‐based Explanation For Momentum–epu Relationmentioning

confidence: 99%

Economic policy uncertainty and momentum

Sun

et al. 2020

Financial Management

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We show that a news‐based measure of economic policy uncertainty (EPU) negatively forecasts momentum. A 1‐standard‐deviation increase in EPU is associated with a 1.11% decrease in risk‐adjusted momentum returns. The predictive power of EPU is robust after controlling for previously documented economic state variables and macroeconomic uncertainty. We provide an explanation for these results from the perspective of a fund flow‐induced trading mechanism and offer direct empirical support. The literature documents that momentum can be partially attributed to performance‐chasing mutual fund flows. We find that this flow‐induced mechanism functions more effectively in low EPU states, thereby generating stronger stock momentum.

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Section: A Fund Flow‐based Explanation For Momentum–epu Relationmentioning

confidence: 99%

Economic policy uncertainty and momentum

Sun

et al. 2020

Financial Management

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“…We use two measures of portfolio choices as in Giannetti and Wang (2016) and Agarwal et al (2021). The first measure is a continuous variable that measures the value of equity market holdings as a fraction of the total financial assets possessed by each household.…”

Section: Datamentioning

confidence: 99%

“…SIPP provides households' detailed asset holding information and demographics. Following Agarwal et al (2021), we use two measures of stock market participation. The first variable is a continuous variable that measures the value of equity market holdings as a share of the total financial assets possessed by each household.…”

Section: Introductionmentioning

confidence: 99%

“…Our work contributes to the recent literature that examines the impact of macroeconomic and policy uncertainty on individual households' portfolio decisions. Agarwal et al (2021) study how increased political uncertainty due to a US gubernatorial election affects households' stock market participation. Gábor‐Tóth and Georgarakos (2019) study the impact of EPU on the household's portfolio choice, using the Health and Retirement Study surveying Americans aged 50 and over.…”

Section: Introductionmentioning

confidence: 99%

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Which economic uncertainty measure matters for households' portfolio decision?

Lee

Jeon

Kim

2021

J of Financial Research

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In this study, we address two research questions: Do recently developed economic uncertainty measures matter for household portfolio choices? If so, which measure is most important? Using household data, we compare 16 uncertainty measures in our unified framework. We find that the economic policy uncertainty (EPU) measure is the most important for household portfolios. We further find that married, more educated, older, and wealthier households are more sensitive to EPU. Finally, our findings highlight the importance of labor income in the sensitivity of households' portfolio decisions to uncertainty.

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“…Agarwal et al . () use US household data based on the micro‐level longitudinal Survey of Income and Program Participation to examine the association between political uncertainty and US households’ participation in the equity market between 1996 and 2011 for more than 152 000 unique households. They find reduced equity participation by households during gubernatorial election periods and in periods with high economic policy uncertainty.…”

Section: Political Uncertainty Economy and Householdsmentioning

confidence: 99%

Political Uncertainty and Finance: A Survey

Dai

Zhang

2019

Asia-Pac J of Fin Stud

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An emerging stream of literature investigates the impact of political uncertainty on financial markets. In this survey, we review this line of literature from four perspectives, namely, asset prices, corporate policies, financial intermediaries, and economy and households, suggesting that political uncertainty generally increases market friction and as a result changes corporate behavior and adversely affects the economy. At the end of the survey, we discuss a few future directions worth being explored in view of the relationship between political uncertainty and finance. most likely to occur if the old policy has led to unexpected low realized profitability. Therefore, policy change can increase firms' expected profitability, thereby pushing stock prices up, that is, the cash flow effect. However, due to the new policy's higher uncertainty, policy change can also increase discount rates, thereby pushing stock prices down, that is, the discount rate effect. The authors show analytically that, on average, the discount rate effect will outweigh the cash flow effect and stock prices will fall at the announcement of a government policy change. The reason is that positive announcement returns tend to be small as policy changes that have the potential to push stock prices up are mostly expected by investors. Moreover, as new policies introduce more uncertainty and raise the volatility of the stochastic discount factor, government policy changes will increase stock return volatilities and correlations.Closely related to P astor and Veronesi (2012, 2013) analyze the risk premium induced by political uncertainty. P astor and Veronesi (2013) extend the general equilibrium model developed by P astor and Veronesi (2012) in two key aspects. First, unlike P astor and Veronesi (2012) who assume political cost is unknown to investors, P astor and Veronesi (2013) allow investors to learn about the political costs of the new policies through the stream of political news. Second, P astor and Veronesi (2012) assume that all government policies are identical a priori, whereas P astor and Veronesi (2013) allow the government to choose from a set of heterogeneous policies. The impacts of both, the learning about political costs and policy heterogeneity, are larger in weak economic conditions when a policy change is more likely to happen.Accordingly, in P astor and Veronesi's (2013) analytic model, stock returns are driven by capital shocks, impact shocks, and political shocks, and correspondingly the equity risk premium can be decomposed into three components based on the three types of shocks. As the optimal choice for the government is to change its policy when the old policy is perceived as sufficiently unfavorable, the authors show analytically that the composition of the risk premium varies depending on the economic state. In weak economic conditions when the probability of a policy change is high, the equity risk premium is largely driven by the political risk premium. However, in strong economic conditions when a policy change ...

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Policy Uncertainty and Household Stock Market Participation

Cited by 10 publications

References 54 publications

Economic policy uncertainty and momentum

Economic policy uncertainty and momentum

Which economic uncertainty measure matters for households' portfolio decision?

Political Uncertainty and Finance: A Survey

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