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Economic policy uncertainty and stock market volatility

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  • Liu, Li
  • Zhang, Tao

Abstract

This paper investigates the predictability of economic policy uncertainty (EPU) to stock market volatility. Our in-sample evidence suggests that higher EPU leads to significant increases in market volatility. Out-of-sample findings show that incorporating EPU as an additional predictive variable into the existing volatility prediction models significantly improves forecasting ability of these models. The improvement is robust to the model specifications.

Suggested Citation

  • Liu, Li & Zhang, Tao, 2015. "Economic policy uncertainty and stock market volatility," Finance Research Letters, Elsevier, vol. 15(C), pages 99-105.
    • Handle: RePEc:eee:finlet:v:15:y:2015:i:c:p:99-105
    DOI: 10.1016/j.frl.2015.08.009
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    More about this item

    Keywords

    Economic policy uncertainty; Realized volatility; Predictability;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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