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Dynamic Co-movements between Stock Market Returns and Policy Uncertainty

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

Abstract

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.

Suggested Citation

  • Antonakakis, Nikolaos & Chatziantoniou, Ioannis & Filis, George, 2012. "Dynamic Co-movements between Stock Market Returns and Policy Uncertainty," MPRA Paper 42905, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:42905
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    References listed on IDEAS

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    5. 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 217-249, April.
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    7. 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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    Citations

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    Cited by:

    1. Chang, Tsangyao & Chen, Wen-Yi & Gupta, Rangan & Nguyen, Duc Khuong, 2015. "Are stock prices related to the political uncertainty index in OECD countries? Evidence from the bootstrap panel causality test," Economic Systems, Elsevier, vol. 39(2), pages 288-300.
    2. Mehmet Balcilar & Godwin Oluseye Olasehinde-Williams & Muhammad Shahbaz, 2019. "Asymmetric dynamics of insurance premium: the impact of monetary policy uncertainty on insurance premiums in Japan," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 12(3), pages 233-247.
    3. Michael Donadelli, 2015. "Asian stock markets, US economic policy uncertainty and US macro-shocks," New Zealand Economic Papers, Taylor & Francis Journals, vol. 49(2), pages 103-133, August.
    4. Labidi, Chiaz & Rahman, Md Lutfur & Hedström, Axel & Uddin, Gazi Salah & Bekiros, Stelios, 2018. "Quantile dependence between developed and emerging stock markets aftermath of the global financial crisis," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 179-211.
    5. Christou, Christina & Gupta, Rangan, 2020. "Forecasting equity premium in a panel of OECD countries: The role of economic policy uncertainty," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 243-248.
    6. Dakhlaoui, Imen & Aloui, Chaker, 2016. "The interactive relationship between the US economic policy uncertainty and BRIC stock markets," International Economics, Elsevier, vol. 146(C), pages 141-157.
    7. Chow Sheung-Chi & Cunado Juncal & Gupta Rangan & Wong Wing-Keung, 2018. "Causal relationships between economic policy uncertainty and housing market returns in China and India: evidence from linear and nonlinear panel and time series models," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 22(2), pages 1-15, April.
    8. Michael Donadelli, 2015. "Uncertainty shocks and policymakers’ behavior: evidence from the subprime crisis era," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 42(4), pages 578-607, September.
    9. 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.
    10. Serdar Ongan & Ismet Gocer, 2017. "Testing The Causalities Between Economic Policy Uncertainty And The Us Stock Indices: Applications Of Linear And Nonlinear Approaches," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 1-20, December.
    11. repec:ipg:wpaper:36 is not listed on IDEAS
    12. Tihana Škrinjarić & Zrinka Orlović, 2020. "Economic Policy Uncertainty and Stock Market Spillovers: Case of Selected CEE Markets," Mathematics, MDPI, vol. 8(7), pages 1-33, July.
    13. repec:ipg:wpaper:2014-547 is not listed on IDEAS
    14. Donadelli, Michael & Persha, Lauren, 2014. "Understanding emerging market equity risk premia: Industries, governance and macroeconomic policy uncertainty," Research in International Business and Finance, Elsevier, vol. 30(C), pages 284-309.
    15. 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.
    16. repec:ipg:wpaper:2013-036 is not listed on IDEAS
    17. Xiao-lin Li & Mehmet Balcilar & Rangan Gupta & Tsangyao Chang, 2016. "The Causal Relationship Between Economic Policy Uncertainty and Stock Returns in China and India: Evidence from a Bootstrap Rolling Window Approach," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(3), pages 674-689, March.

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    More about this item

    Keywords

    Policy uncertainty; dynamic correlation; stock market return; oil shock;
    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
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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