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How do economic policy uncertainties affect stock market volatility? Evidence from G7 countries

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  • Yaming Ma
  • Ziwei Wang
  • Feng He

Abstract

This study explores the dynamic and frequency spillover characteristics between economic policy uncertainty (EPU) and stock market realized volatility (RV) in G7 countries. We apply the monthly data of country‐specific economic policy uncertainty indices and realized volatility to calculate the directional spillover indicator. Then we use a Fourier transformation to calculate the frequency of spillovers to study the duration of the spillover effect. We find that the spillover effect of EPU on stock market volatility is relatively large in the U.S., Japan and Canada, and has certain regional similarities. EPU has longer spillover effects on the stock markets of France, Germany and Italy, which is strongest over 3–18 months. Finally, important economic events such as the financial crisis and the Brexit, increased EPU spillover level and lasting time. We provide the dynamic and frequency spillover characteristics between EPU and the stock market in G7 countries, making this study useful for international asset allocation and risk management.

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  • Yaming Ma & Ziwei Wang & Feng He, 2022. "How do economic policy uncertainties affect stock market volatility? Evidence from G7 countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2303-2325, April.
    • Handle: RePEc:wly:ijfiec:v:27:y:2022:i:2:p:2303-2325
    DOI: 10.1002/ijfe.2274
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