The Asset-Pricing Implications of Government Economic Policy Uncertainty

Abstract

Using the news-based measure of Baker et al. [Baker SR, Bloom N, Davis SJ (2013) Measuring economic policy uncertainty. Working paper, Stanford University, Stanford, CA] to capture economic policy uncertainty (EPU) in the United States, we find that EPU positively forecasts log excess market returns. An increase of one standard deviation in EPU is associated with a 1.5% increase in forecasted three-month abnormal returns (6.1% annualized). Furthermore, innovations in EPU earn a significant negative risk premium in the Fama–French 25 size–momentum portfolios. Among the Fama–French 25 portfolios formed on size and momentum returns, the portfolio with the greatest EPU beta underperforms the portfolio with the lowest EPU beta by 5.53% per annum, controlling for exposure to the Carhart four factors as well as implied and realized volatility. These findings suggest that EPU is an economically important risk factor for equities. This paper was accepted by Wei Jiang, finance.

The impacts of global economic policy uncertainty on stock market returns in regime switching environment: Evidence from sectoral perspectives

“…Thus, the negative lagged effect of GEPU is appeared for this sector. The negative lagged effect of GEPU is consistent with the extant of studies (Antonakakis et al, 2013;Arouri et al, 2014Arouri et al, & 2016Brogaard & Detzel, 2015;Chang et al, 2015;Kang & Ratti, 2013;Kang, Ratti, & Vespignani, 2017a, Kang, Gracia, & Ratti, 2017bKo & Lee, 2015). Furthermore, the positive effect of GEPU in high-volatile regime infers that risk has been compensated with higher returns in high-volatility regime, which is consistent with capital market theory and Merton (1973).…”

“…The attention on these relationships started with the groundbreaking seminal work of Bloom (2009). After introduction of the EPU index, the research approachability has been growing for exploring effects of EPU on various economic and financial indicators such as corporate governance (Zhang, Han, Pan, & Huang, 2015), investment behaviour (Wang, Chen, & Huang, 2014), economic development (Scheffel, 2016), monetary policy effects (Aastveit, Natvik, & Sola, 2017), commodity markets (Andreasson, Bekiros, Nguyen, & Uddin, 2016;Antonakakis, Chatziantoniou, & Filis, 2014;Reboredo & Uddin, 2016;Wang, Zhang, Diao, & Wu, 2015), investment (Kang et al, 2015), bond and option market (Liu & Zhang, 2015), stock price (Brogaard & Detzel, 2015;Ko & Lee, 2015,), stock market volatility (Arouri et al, 2016;Liu & Zhang, 2015), and risk (Bernal, Gnabo, & Guilmin, 2016;Brogaard & Detzel, 2015;Tsai, 2017). However, with some innovations, later, Baker et al (2016) develop a new index, which is known as GEPU (here after GEPU) index that creates new opportunities for exploring and investigating how GEPU influences stock markets, investing environment, and financing environment.…”

The Impact of Brexit on the Stock Markets of the Greater China Region

“…Political uncertainty in the region could be a result of political instability in neighboring countries, such as the political ambitions of the North Korean leader and the implications of the One Belt One Road (OBOR) initiative, which is not that welcome by countries such as Vietnam and Japan. The research outcomes seem to align partially with theoretical positions that indicate that policy uncertainty will lead to depressing market returns, with the findings showing evidence of market returns and policy uncertainty being negative, and with decreases in stock market returns as a response to unexpected policy uncertainty (Li and Peng 2017;Antonakakis et al 2013;Brogaard and Detzel 2014;Kang and Ratti 2015;and Liu and Zhang 2015). The economic and financial justification of the outlined models' rests on the need of understanding if stock markets in the GCR can be used by investors when diversifying their portfolios during times of increased market uncertainty.…”

“…The recent literature looking at economic policy uncertainty and stock markets include Arouri et al (2016) with their analysis of the US stock markets over the period 1900-2014; they find that an increase in economic policy uncertainty (EPU) reduces, in a significant manner, stock returns with the effect being stronger during extreme volatility periods. Scholars have also studied the implications of policy shocks on macroeconomic variables such as growth, inflation, and employment (Fernández-Villaverde et al 2014) with some limitations regarding studies that integrate stock markets (Antonakakis et al 2013;Brogaard and Detzel 2014;Ratti 2013, 2015;Liu and Zhang 2015). The understanding of the implications derived from policy uncertainty on the real economy is significant as economic agents take decisions based on the political climate and as such, employment, investment, consumption, and saving decisions are all affected (Gulen and Ion 2013).…”

Economic Policy Uncertainty and Housing Returns in Germany: Evidence From a Bootstrap Rolling Window

“…Aizenman and Marion (1993) find that policy uncertainty can suppress the investment. Brogaard and Detzel (2015) find that EPU earns a significant negative risk premium in the portfolios and argue that EPU is an important risk factor for equities.…”