The role of economic policy uncertainties in predicting stock returns and their volatility for Hong Kong, Malaysia and South Korea

Abstract

Highlights• We analyze the predictability of stock return and its volatility of Hong Kong, Malaysia and South Korea • We base on the measure of domestic and global economic policy uncertainties (EPU) • Linear Granger causality tests fail to find evidence of predictability from EPU • A nonparametric causality-in-quantiles test, however, finds strong evidence of causality • Nonparametric test is found to be more robust relative to the standard linear causality test. AbstractThis paper analyzes 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. * We would like to thank anonymous referees for many helpful comments. However, any remaining errors are solely ours.

Are disaggregate industrial returns sensitive to economic policy uncertainty

“…Furthermore, investigating EPU in developed markets i.e. US also conclude its dynamic impact on international equity market returns with respect to portfolio diversification (Mensi et al, 2014;Balcilar et al, 2015).…”

Which popular predictor is more useful to forecast international stock markets during the coronavirus pandemic: VIX vs EPU?

“…Closely related to risk prevention of extreme risk, tail risk, spillover etc., accurate volatility prediction can provide valuable information for market investors, policy makers, economic activities ( Bollerslev, Hood, Huss, & Pedersen, 2018 ; Ma, Liao, Zhang, & Cao, 2019 ). Although it is difficult to improve forecasting accuracy, increasing studies document that popular uncertainty indexes, EPU and VIX, contain useful information for forecasting stock market volatility ( Balcilar, Gupta, Kim, & Kyei, 2019 ; Bekaert & Hoerova, 2014 ; Brogaard & Detzel, 2015 ; Liu & Zhang, 2015 ). Specifically, Liang, Wei, and Zhang (2020) investigate the VIX's forecasting ability for eight international stock markets, the results indicate VIX index exhibits powerful predictive ability.…”

Forecasting Chinese EPU based on financial uncertainty in emerging market economies (EMEs): evidence from six selected East Asian economies

“…The literature exploring the connection of return and/or volatility of the stock market with EPU has flourished across the globe, including both developed and emerging economies. Extensive research has mainly concentrated on exploring the relationship of own country EPU with the returns/volatility of local stock markets (Bekiros et al, 2016;Rahman et al, 2019) among others, while various studies explored the transnational influences of EPU on the stock markets of other emerging economies such as Brazil, Australia, Canada, Japan, China, South Africa, and on the financial markets of some trade group countries such as ASEAN, BRIC, EU and GCC (Balcilar et al, 2019;Carri ere-Swallow & C espedes, 2013;Istiak & Alam, 2019;Kang & Ratti, 2015) among others.…”

“…The authors used a counterfactual approach of nonparametric kernel density estimation technique and concluded that Chinese EPU explains variations in prices of AH shares, and significantly decreases AH premium share index returns. Furthermore, some studies have also explored the spillover effects of Chinese EPU on macro-economic activities (see, for example, Fontaine et al, 2017;Yan, 2018), leverage decisions of shipping firms in Thailand (Kotcharin & Maneenop, 2018) stock markets (Balcilar et al, 2019;Tsai, 2017).…”