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Multiscale relationship between economic policy uncertainty and sectoral returns: Implications for portfolio management

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  • Rababa’a, Abdel Razzaq Al
  • Alomari, Mohammad
  • Rehman, Mobeen Ur
  • McMillan, David
  • Hendawi, Raed

Abstract

This study examines the multiscale links between economic policy uncertainty (EPU) and sectoral stock returns in China, India, the UK, and the US. We find that the impact of domestic EPU on sectoral returns persists at low frequencies and over the full sample period, especially in the financial sectors of China, the UK, and the US. The combined impact of domestic and US EPU endures the longest in the UK and China over a 16–32 month horizon. We also observe a high Sharpe ratio (low Value-at-Risk; VaR) in the presence of considerable US EPU that flips across sectors. During rising US EPU, the portfolio optimization exercise suggests weighting Chinese and Indian sectors higher. Finally, the VaR exercise produces identical portfolio diversification benefits in the equally weighted global and China stocks portfolios.

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  • Rababa’a, Abdel Razzaq Al & Alomari, Mohammad & Rehman, Mobeen Ur & McMillan, David & Hendawi, Raed, 2022. "Multiscale relationship between economic policy uncertainty and sectoral returns: Implications for portfolio management," Research in International Business and Finance, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:riibaf:v:61:y:2022:i:c:s0275531922000526
    DOI: 10.1016/j.ribaf.2022.101664
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    More about this item

    Keywords

    Wavelet coherence; Economic policy uncertainty; Sectoral returns; Value at risk; Sharpe ratio;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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