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Economic policy uncertainty, market returns and expected return predictability

Economic policy uncertainty, market returns and expected return predictability PurposeUsing the economic policy uncertainty (EPU) index as a proxy for the level of EPU, we study the impact of the level of EPU on the conditional mean of market returns and we examine the predictive power of EPU on future market returns.Design/methodology/approachWe employ a GARCH-in-Mean model with exogenous variables.FindingsThe results show that even after controlling for business cycle effects, EPU is inversely related to contemporaneous market returns. Particularly, the authors find that the negative impact of EPU subsists only during recessions or recessionary states of the economy, and has no discernible effects during expansionary periods.Originality/valueThis is the first study to examine the predictive power of EPU on future market returns. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economic Policy Emerald Publishing

Economic policy uncertainty, market returns and expected return predictability

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1757-6385
DOI
10.1108/JFEP-11-2016-0074
Publisher site
See Article on Publisher Site

Abstract

PurposeUsing the economic policy uncertainty (EPU) index as a proxy for the level of EPU, we study the impact of the level of EPU on the conditional mean of market returns and we examine the predictive power of EPU on future market returns.Design/methodology/approachWe employ a GARCH-in-Mean model with exogenous variables.FindingsThe results show that even after controlling for business cycle effects, EPU is inversely related to contemporaneous market returns. Particularly, the authors find that the negative impact of EPU subsists only during recessions or recessionary states of the economy, and has no discernible effects during expansionary periods.Originality/valueThis is the first study to examine the predictive power of EPU on future market returns.

Journal

Journal of Financial Economic PolicyEmerald Publishing

Published: Aug 7, 2017

References