Uncertainty and Volatility: Sectoral Equity Responses to Economic and Policy Shocks in the U.S

This study investigates the effects of economic policy and financial uncertainty on equity return volatility across major U.S. sectoral indices. Specifically, it examines the relationships between uncertainty indices and the S&P 500 financials sector index (SPF), the Wilshire U.S. Real Estate Investment Trust Total Market Index (WRE), and the iShares U.S. Consumer Staples ETF (IYK). The analysis employs GARCH-MIDAS methodology, Markov Switching Regressions (MSR), Threshold Regressions, and Granger causality tests. Results from the sectoral analysis indicate varying degrees of sensitivity to uncertainty across sectors. The consumer staples sector exhibits consistently high volatility, largely driven by shifts in consumer sentiment, income dynamics, and inflation expectations. Over the long term, global economic policy uncertainty (GEPU) and recession risk further amplify volatility in this sector, reflecting its deep integration into global supply chains. The real estate sector demonstrates a more conditional response; its volatility increases significantly in the presence of economic policy uncertainty (EPU), but primarily during periods of elevated recession risk. Under stable economic conditions, real estate equities appear relatively insensitive to both inflation expectations and GEPU. In contrast, the financial sector displays both short- and long-term strong and persistent sensitivity to indicators, particularly EPU, inflation expectations, and the VIX.