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Uncertainty and US stock market dynamics

Author

Listed:
  • López, Raquel
  • Sevillano, María Caridad
  • Jareño, Francisco

Abstract

This study investigates the long-term and dynamic relationship between US sector stock returns and risk factors, focusing on uncertainty. Uncertainty risk factors include volatility indices associated with the equity (VIX), fixed-income (TYVIX), oil (OVX), and foreign exchange (EUVIX) markets. The cointegration analysis shows that VIX, TYVIX, OVX, and EUVIX are collectively driving forces of US sector indices in the long run. The causality testing results reveal that uncertainty about long-term interest rates, as proxied by TYVIX, exerts a significant effect on US stock market performance across sectors. Interestingly, in determining the variability of sector stock returns, we find that shocks to the uncertainty of crude oil prices and the exchange rate play a more important role than shocks to their levels. Risk diversification opportunities are identified.

Suggested Citation

  • López, Raquel & Sevillano, María Caridad & Jareño, Francisco, 2023. "Uncertainty and US stock market dynamics," Global Finance Journal, Elsevier, vol. 56(C).
    • Handle: RePEc:eee:glofin:v:56:y:2023:i:c:s1044028322000813
    DOI: 10.1016/j.gfj.2022.100779
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    Cited by:

    1. Ali, Shoaib & Al-Nassar, Nassar S. & Naveed, Muhammad, 2024. "Bridging the gap: Uncovering static and dynamic relationships between digital assets and BRICS equity markets," Global Finance Journal, Elsevier, vol. 60(C).
    2. Sevillano, María Caridad & Jareño, Francisco & López, Raquel & Esparcia, Carlos, 2024. "Connectedness between oil price shocks and US sector returns: Evidence from TVP-VAR and wavelet decomposition," Energy Economics, Elsevier, vol. 131(C).
    3. Qin, Meng & Mirza, Nawazish & Su, Chi-Wei & Umar, Muhammad, 2023. "Exploring Bubbles in the Digital Economy: The Case of China," Global Finance Journal, Elsevier, vol. 57(C).

    More about this item

    Keywords

    Exchange rate; Interest rate; Oil; Sector indices; Uncertainty; Volatility;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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