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Dynamic Co-movements between Stock Market Returns and Policy Uncertainty

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  • Antonakakis, Nikolaos
  • Chatziantoniou, Ioannis
  • Filis, George

Abstract

In this paper we examine the extent of time-varying correlations between stock markets returns and policy uncertainty based on a newly introduced uncertainty index by Baker et al. (2012). We identify several empirical regularities: (1) the dynamic correlations of policy uncertainty and stock market returns are consistently negative. (2) Increased stock market volatility increases policy uncertainty and dampens stock markets returns. (3) Increases in the volatility of policy uncertainty lead to negative stock market returns and increased uncertainty. (4) Oil specific demand shocks and domestic shocks (price and income shocks) lead to further increase in the negative correlation between policy uncertainty and stock market returns.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42905.

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Date of creation: 28 Nov 2012
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Handle: RePEc:pra:mprapa:42905

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Keywords: Policy uncertainty; dynamic correlation; stock market return; oil shock;

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  1. Jones, Paul M. & Olson, Eric, 2013. "The time-varying correlation between uncertainty, output, and inflation: Evidence from a DCC-GARCH model," Economics Letters, Elsevier, Elsevier, vol. 118(1), pages 33-37.
  2. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5994, C.E.P.R. Discussion Papers.
  3. Christopher F. Baum & Mustafa Caglayan & Oleksandr Talavera, 2010. "On the sensitivity of firms' investment to cash flow and uncertainty," Oxford Economic Papers, Oxford University Press, vol. 62(2), pages 286-306, April.
  4. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(3), pages 339-50, July.
  5. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, Elsevier, vol. 36(2), pages 229-242, October.
  6. Aizenman, Joshua & Marion, Nancy P, 1993. "Policy Uncertainty, Persistence and Growth," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 1(2), pages 145-63, June.
  7. Steffen Elstner & Eric Sims & Ruediger Bachmann, 2010. "Uncertainty and Economic Activity: Evidence from Business Survey Data," 2010 Meeting Papers, Society for Economic Dynamics 614, Society for Economic Dynamics.
  8. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  9. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
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Cited by:
  1. Donadelli, Michael & Persha, Lauren, 2014. "Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty," Research in International Business and Finance, Elsevier, Elsevier, vol. 30(C), pages 284-309.
  2. Xiao-lin Li & Mehmet Balcilar & Rangan Gupta & Tsangyao Chang, 2013. "The Causal Relationship between Economic Policy Uncertainty and Stock Returns in China and India: Evidence from a Bootstrap Rolling-Window Approach," Working Papers, University of Pretoria, Department of Economics 201345, University of Pretoria, Department of Economics.
  3. Tsangyao Chang & Wen-Yi Chen & Rangan Gupta & Duc Khuong Nguyen, 2013. "Are Stock Prices Related to Political Uncertainty Index in OECD Countries? Evidence from Bootstrap Panel Causality Test," Working Papers, University of Pretoria, Department of Economics 201360, University of Pretoria, Department of Economics.
  4. repec:ipg:wpaper:36 is not listed on IDEAS

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