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Dynamic Co-movements between Stock Market Returns and Policy Uncertainty

  • Antonakakis, Nikolaos
  • Chatziantoniou, Ioannis
  • Filis, George

In this paper we examine the extent of time-varying correlations between stock markets returns and policy uncertainty based on a newly introduced uncertainty index by Baker et al. (2012). We identify several empirical regularities: (1) the dynamic correlations of policy uncertainty and stock market returns are consistently negative. (2) Increased stock market volatility increases policy uncertainty and dampens stock markets returns. (3) Increases in the volatility of policy uncertainty lead to negative stock market returns and increased uncertainty. (4) Oil specific demand shocks and domestic shocks (price and income shocks) lead to further increase in the negative correlation between policy uncertainty and stock market returns.

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File URL: http://mpra.ub.uni-muenchen.de/42905/1/MPRA_paper_42905.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42905.

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Date of creation: 28 Nov 2012
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Handle: RePEc:pra:mprapa:42905
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  1. Nicholas Bloom, 2007. "The Impact of Uncertainty Shocks," NBER Working Papers 13385, National Bureau of Economic Research, Inc.
  2. Christopher F. Baum & Mustafa Caglayan & Oleksandr Talavera, 2006. "On the Sensitivity of Firms' Investment to Cash Flow and Uncertainty," Boston College Working Papers in Economics 638, Boston College Department of Economics, revised 26 Apr 2008.
  3. R?diger Bachmann & Steffen Elstner & Eric R. Sims, 2013. "Uncertainty and Economic Activity: Evidence from Business Survey Data," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(2), pages 217-49, April.
  4. Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers.
  5. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
  6. Aizenman, Joshua & Marion, Nancy P, 1993. "Policy Uncertainty, Persistence and Growth," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 145-63, June.
  7. Ben S. Bernanke, 1980. "Irreversibility, Uncertainty, and Cyclical Investment," NBER Working Papers 0502, National Bureau of Economic Research, Inc.
  8. Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
  9. Jones, Paul M. & Olson, Eric, 2013. "The time-varying correlation between uncertainty, output, and inflation: Evidence from a DCC-GARCH model," Economics Letters, Elsevier, vol. 118(1), pages 33-37.
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