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Cross-category, trans-Pacific spillovers of policy uncertainty and financial market volatility

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  • Thiem, Christopher

Abstract

Using generalised variance decompositions from vector autoregressions, we analyse cross-country, cross-category spillovers of economic policy uncertainty (EPU) and financial market volatility between the US and Japan. Our model includes indices of monetary, fiscal and trade policy uncertainty for each country, as well as three measures of option-implied stock market and exchange rate volatility, respectively. We find that the financial market volatility indices are usually substantial net spillover transmitters towards the total group of EPU measures. However, the Japanese equity and especially the FX volatility index are typically more affected by EPU spillovers than the US VXO. Our results also reveal that, compared to within-country spillovers, cross-country spillovers of EPU are relatively small and less volatile. Finally, we show that the direction of net EPU spillovers between the US and Japan is both time- and category-dependent with different EPU categories acting as strong sources of uncertainty spillovers throughout the sample period.

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  • Thiem, Christopher, 2018. "Cross-category, trans-Pacific spillovers of policy uncertainty and financial market volatility," Ruhr Economic Papers 782, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    • Handle: RePEc:zbw:rwirep:782
    DOI: 10.4419/86788910
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    Cited by:

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    2. Sarfraz Hussain & Rosalan Ali & Walid Emam & Yusra Tashkandy & Pradeep Mishra & Mochammad Fahlevi & Adelajda Matuka, 2023. "Economic Policy Uncertainty and Firm Value: Impact of Investment Sentiments in Energy and Petroleum," Sustainability, MDPI, vol. 15(12), pages 1-28, June.
    3. Zeng, Qing & Lu, Xinjie & Dong, Dayong & Li, Pan, 2022. "Category-specific EPU indices, macroeconomic variables and stock market return predictability," International Review of Financial Analysis, Elsevier, vol. 84(C).
    4. Czudaj, Robert L., 2023. "Expectation Formation and the Phillips Curve Revisited," MPRA Paper 119478, University Library of Munich, Germany.

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    More about this item

    Keywords

    economic policy uncertainty; exchange rate volatility; Japan; spillovers; stock market volatility; United States; vector autoregression;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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