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The Interactive Relationship Between the US Economic Policy Uncertainty and BRIC Stock Markets

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  • Imen Dakhlaoui
  • Chaker Aloui

Abstract

The purpose of this paper is to investigate the dynamics of volatility spillovers between the US economic policy uncertainty and the BRIC equity markets. To do so, we perform the cross correlation function suggested by Cheung–Ng (1996) within a rolling approach. Although the mean return spillover between the BRIC stock indices and US uncertainty is negative, the volatility spillover is found to oscillate between negative and positive values. Therefore, it is highly risky for investors to invest in the US and BRIC stock markets simultaneously. In addition, we find that there is strong evidence of a time-varying correlation between US economic uncertainty and stock market volatility. Furthermore, the correlation is found to be highly volatile during periods of global economic instability. So, market participants in the BRIC stock markets do closely monitor the US economic policy conditions.

Suggested Citation

  • Imen Dakhlaoui & Chaker Aloui, 2016. "The Interactive Relationship Between the US Economic Policy Uncertainty and BRIC Stock Markets," International Economics, CEPII research center, issue 146, pages 141-157.
  • Handle: RePEc:cii:cepiie:2016-q2-146-7
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    Cited by:

    1. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2019. "The impact of economic policy uncertainty and commodity prices on CARB country stock market volatility," MPRA Paper 96577, University Library of Munich, Germany.
    2. Kang, Wensheng & Ratti, Ronald A. & Vespignani, Joaquin L., 2017. "Oil price shocks and policy uncertainty: New evidence on the effects of US and non-US oil production," Energy Economics, Elsevier, vol. 66(C), pages 536-546.
    3. Shahzad, Syed Jawad Hussain & Raza, Naveed & Balcilar, Mehmet & Ali, Sajid & Shahbaz, Muhammad, 2017. "Can economic policy uncertainty and investors sentiment predict commodities returns and volatility?," Resources Policy, Elsevier, vol. 53(C), pages 208-218.
    4. Mikhail Stolbov & Alexander Karminsky & Maria Shchepeleva, 2018. "Does Economic Policy Uncertainty Lead Systemic Risk? A Comparative Analysis of Selected European Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(3), pages 332-360, September.
    5. Belcaid, Karim & El Ghini, Ahmed, 2019. "U.S., European, Chinese economic policy uncertainty and Moroccan stock market volatility," The Journal of Economic Asymmetries, Elsevier, vol. 20(C).
    6. Phan, Dinh Hoang Bach & Sharma, Susan Sunila & Tran, Vuong Thao, 2018. "Can economic policy uncertainty predict stock returns? Global evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 55(C), pages 134-150.
    7. Yao, Can-Zhong & Sun, Bo-Yi, 2018. "The study on the tail dependence structure between the economic policy uncertainty and several financial markets," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 245-265.
    8. Fang, Libing & Yu, Honghai & Li, Lei, 2017. "The effect of economic policy uncertainty on the long-term correlation between U.S. stock and bond markets," Economic Modelling, Elsevier, vol. 66(C), pages 139-145.
    9. Ji, Qiang & Bouri, Elie & Roubaud, David, 2018. "Dynamic network of implied volatility transmission among US equities, strategic commodities, and BRICS equities," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 1-12.
    10. Kang, Wensheng & Perez de Gracia, Fernando & Ratti, Ronald A., 2017. "Oil price shocks, policy uncertainty, and stock returns of oil and gas corporations," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 344-359.
    11. Chuliá, Helena & Gupta, Rangan & Uribe, Jorge M. & Wohar, Mark E., 2017. "Impact of US uncertainties on emerging and mature markets: Evidence from a quantile-vector autoregressive approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 178-191.
    12. Hu, Zhijun & Kutan, Ali M. & Sun, Ping-Wen, 2018. "Is U.S. economic policy uncertainty priced in China's A-shares market? Evidence from market, industry, and individual stocks," International Review of Financial Analysis, Elsevier, vol. 57(C), pages 207-220.
    13. Rehman, Mobeen Ur, 2018. "Do oil shocks predict economic policy uncertainty?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 498(C), pages 123-136.
    14. You, Wanhai & Guo, Yawei & Zhu, Huiming & Tang, Yong, 2017. "Oil price shocks, economic policy uncertainty and industry stock returns in China: Asymmetric effects with quantile regression," Energy Economics, Elsevier, vol. 68(C), pages 1-18.
    15. Kang, Wensheng & de Gracia, Fernando Perez & Ratti, Ronald A., 2019. "The asymmetric response of gasoline prices to oil price shocks and policy uncertainty," Energy Economics, Elsevier, vol. 77(C), pages 66-79.
    16. Das, Debojyoti & Kumar, Surya Bhushan, 2018. "International economic policy uncertainty and stock prices revisited: Multiple and Partial wavelet approach," Economics Letters, Elsevier, vol. 164(C), pages 100-108.
    17. Guglielmo Maria Caporale & Menelaos Karanasos & Stavroula Yfanti, 2019. "Macro-Financial Linkages in the High-Frequency Domain: The Effects of Uncertainty on Realized Volatility," CESifo Working Paper Series 8000, CESifo Group Munich.
    18. Chris Redl, 2018. "Macroeconomic Uncertainty in South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 86(3), pages 361-380, September.

    More about this item

    Keywords

    Cross Correction Function; Rolling Correlation; Economic Uncertainty; BRIC Equity Markets; Volatility Spillovers;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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