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The impact of economic policy uncertainty on stock market liquidity: does COVID-19 sentiment matter?

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  • Abhrajit Sarkar
  • Anwesha Sarkar

Abstract

This study examines the relationship between EPU and stock market liquidity in Brazil, India, and the US during COVID-19, considering aggregate and sectoral data. Using wavelet coherence with ILLIQ and HLS, results show the EPU-liquidity link is time-varying, frequency-dependent, and sensitive to pandemic sentiment shifts. In Brazil and India, illiquidity often preceded policy uncertainty, highlighting the vulnerability of emerging markets. The USA showed a bidirectional loop where uncertainty constrained liquidity. Sector analysis reveals diverse patterns: healthcare and consumer staples driven by policy uncertainty; technology and hospitality by liquidity; energy by bidirectional causality. Central banks should develop preemptive liquidity facilities, and the USA Federal Reserve should monitor EPU-liquidity to disrupt feedback. Regulators need sector-specific circuit breakers. Investors should tailor hedging, risk managers should use regime-switching models, corporate treasurers should hold sector-specific buffers, and traders should calibrate strategies by frequency.

Suggested Citation

  • Abhrajit Sarkar & Anwesha Sarkar, 2026. "The impact of economic policy uncertainty on stock market liquidity: does COVID-19 sentiment matter?," American Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 9(3), pages 236-274.
    • Handle: RePEc:ids:amerfa:v:9:y:2026:i:3:p:236-274
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