Asymmetric volatility spillovers between international economic policy uncertainty and the U.S. stock market

Abstract

This paper studies the asymmetric spillover effect of important economic policy uncertainty (EPU) on the S&P500 index. We use monthly EPU indexes from Australia, Canada, China, Japan, the U.K. and the U.S. and the realized volatility of the U.S. stock market to study the asymmetric pairwise directional spillovers on the U.S. stock market from 2000 to 2019. We find that S&P500 index volatility is a net recipient of spillovers from important EPU indexes. Japanese EPU has the strongest spillover effect on the U.S. stock markets, while EPU from the U.K. plays a very limited role. By decomposing the volatility into good and bad volatility, we find that the relationship between bad stock market volatility and EPU is stronger than between good volatility and EPU. Time-varying spillover characteristics show that bad volatility reacts more strongly to shocks in EPU following the debt crisis and trade negotiations. Several robustness checks are provided to verify the novelty of these findings.