Monetary Policy Uncertainty and Stock Market Returns in Developed and Emerging Countries: Evidence from a Quantile-on-Quantile Approach

[Purpose] In the recent past, investors, decision-makers, and academics have shown an immense level of interest in policy uncertainty because of its devastating effect on the macroeconomic landscape of countries. Consequently, this study examines the impact of monetary policy uncertainty (MPU) on the stock market returns of emerging and developed countries. [Methodology] To achieve the study’s objective, monthly data of MPU and stock prices covering January 2000 to June 2023 are employed. This study used the Quantile-on-Quantile regression (QQR) approach for empirical estimations. [Findings] The outcome indicates that stock returns in developed as well as emerging economies are negatively affected by MPU. Furthermore, findings observe significant variation between quantiles of MPU and stock returns within each economy. Additionally, this study also reveals that MPU has a positive impact on stock market returns when the uncertainty is at a lower quantile. It is also noticed that stock market reactions are more erratic in emerging as well as in developed economies. [Originality/value] This study provides a comprehensive and precise interpretation of the dynamic relationship between MPU and stock returns, revealing how the stock market counters the MPU across various quantiles. [Implications] The findings provide valuable insights for both policymakers and investors, emphasizing the role of financial openness, stock market conditions, and varying levels of policy uncertainty when developing domestic policies. More specifically, the results offer valuable guidance for portfolio managers seeking to hedge against policy-driven volatility and for regulators aiming to strengthen financial resilience.