Asian stock market volatility and economic policy uncertainty: The role of world and regional leaders

Abstract

This paper investigates the relative influence of the United States, China, Japan and the European Union on Asian stock markets from the perspective of economic policy uncertainty (EPU). The empirical setting assumes that stock markets evolve through high- and low-volatility regimes with a probability driven by EPU in these leader countries. The main result of the paper indicates that Chinese EPU surpasses Japanese and US EPU as the main driver of Asian stock market volatility, except in the South Korean and Hong Kong stock markets. Moreover, Chinese policy-specific uncertainty indices, such as monetary, fiscal, trade and exchange rate policies play a significant role but in the most developed financial markets only. These result provides further evidence that China’s economic and financial ties with its near neighbors are deepening, which has important implications for the regional institutions tasked with promoting and monitoring regional financial stability.