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Are Stock Prices Related to Political Uncertainty Index in OECD Countries? Evidence from Bootstrap Panel Causality Test

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  • Tsangyao Chang

    ()
    (Department of Finance, Feng Chia University, Taichung, Taiwan)

  • Wen-Yi Chen

    ()
    (Center of Health Research and Development, National Taichung University of Science and Technology, Taichung, Taiwan)

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Duc Khuong Nguyen

    ()
    (IPAG Lab, IPAG Business School, France.)

Abstract

This study applies bootstrap panel causality, proposed by Kónya (2006), to investigate causal link be-tween political uncertainty and stock price for seven OECD countries over the monthly period of 2001.01 to 2013.04. This modeling approach allows us to examine both the cross-sectional dependency and the country-specific heterogeneity. Our empirical results indicate that not all the countries are alike and that the theoretical prediction that stock prices fall at the announcement of a policy change is not always supported. Specifically, we find evidence of the stock price leading hypothesis for Italy and Spain, while the political uncertainty leading hypothesis cannot be rejected for the United Kingdom and the United States. In addition, the neutrality hypothesis was supported in the remaining three countries (Canada, France, and Germany), while the feedback hypothesis, however, is never found.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201360.

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Length: 21 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:pre:wpaper:201360

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Keywords: Stock Price; Political Uncertainty Index; Bootstrap Panel Causality Test;

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