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High policy uncertainty and low implied market volatility: An academic puzzle?

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  • Białkowski, Jędrzej
  • Dang, Huong Dieu
  • Wei, Xiaopeng

Abstract

Motivated by the extremely low level of the CBOE VIX accompanied by the high level of U.S. economic policy uncertainty in the period of late 2016 to the end of 2017, we examine the factors affecting the relationship between market volatility and economic policy uncertainty in the United States and the United Kingdom. Our analysis shows that low-quality political signals, higher opinion divergence among investors, and exceptional equity market performance consistently weaken the positive relationship between implied market volatility and policy uncertainty. Our findings help to explain the divergence between the market volatility index and economic policy uncertainty post the 2016 U.S. presidential election and the UK Brexit referendum.

Suggested Citation

  • Białkowski, Jędrzej & Dang, Huong Dieu & Wei, Xiaopeng, 2022. "High policy uncertainty and low implied market volatility: An academic puzzle?," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1185-1208.
    • Handle: RePEc:eee:jfinec:v:143:y:2022:i:3:p:1185-1208
    DOI: 10.1016/j.jfineco.2021.05.011
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    Cited by:

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    More about this item

    Keywords

    Market volatility; Economic policy uncertainty; Quality of political signals; Bullish market; Investors’ opinions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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