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Are Stock Prices Related to Political Uncertainty Index in OECD Countries? Evidence from Bootstrap Panel Causality Test

Author

Listed:
  • Tsangyao Chang

    () (Department of Finance, Feng Chia University, Taichung, Taiwan)

  • Wen-Yi Chen

    () (Center of Health Research and Development, National Taichung University of Science and Technology, Taichung, Taiwan)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

  • Duc Khuong Nguyen

    () (IPAG Lab, IPAG Business School, France.)

Abstract

This study applies bootstrap panel causality, proposed by Kónya (2006), to investigate causal link be-tween political uncertainty and stock price for seven OECD countries over the monthly period of 2001.01 to 2013.04. This modeling approach allows us to examine both the cross-sectional dependency and the country-specific heterogeneity. Our empirical results indicate that not all the countries are alike and that the theoretical prediction that stock prices fall at the announcement of a policy change is not always supported. Specifically, we find evidence of the stock price leading hypothesis for Italy and Spain, while the political uncertainty leading hypothesis cannot be rejected for the United Kingdom and the United States. In addition, the neutrality hypothesis was supported in the remaining three countries (Canada, France, and Germany), while the feedback hypothesis, however, is never found.

Suggested Citation

  • Tsangyao Chang & Wen-Yi Chen & Rangan Gupta & Duc Khuong Nguyen, 2013. "Are Stock Prices Related to Political Uncertainty Index in OECD Countries? Evidence from Bootstrap Panel Causality Test," Working Papers 201360, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201360
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    References listed on IDEAS

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    Cited by:

    1. repec:ipg:wpaper:2014-459 is not listed on IDEAS
    2. Wensheng Kang & Ronald A. Ratti, 2015. "Oil shocks, policy uncertainty and stock returns in China," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 23(4), pages 657-676, October.
    3. Christina Christou & Rangan Gupta, 2016. "Forecasting Equity Premium in a Panel of OECD Countries: The Role of Economic Policy Uncertainty," Working Papers 201622, University of Pretoria, Department of Economics.
    4. repec:ipg:wpaper:2014-463 is not listed on IDEAS
    5. Mohamed Arouri & Christophe Rault & Frédéric Teulon, 2014. "Economic policy uncertainty, oil price shocks and GCC stock markets," Economics Bulletin, AccessEcon, vol. 34(3), pages 1822-1834.
    6. Wensheng Kang & Ronald A. Ratti, 2014. "Policy Uncertainty in China, Oil Shocks and Stock Returns," CAMA Working Papers 2014-32, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Mohamed Arouri & David Roubaud, 2016. "On the determinants of stock market dynamics in emerging countries: the role of economic policy uncertainty in China and India," Economics Bulletin, AccessEcon, vol. 36(2), pages 760-770.
    8. repec:ipg:wpaper:2014-555 is not listed on IDEAS

    More about this item

    Keywords

    Stock Price; Political Uncertainty Index; Bootstrap Panel Causality Test;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • 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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