Do economic policy uncertainty indices matter in joint volatility cycles between U.S. and Japanese stock markets?

Abstract

This research develops an endogenous Markov-switching interdependent mechanism with volatility persistence and interdependent correlations to analyze synchronous and asynchronous volatility cycles between the U.S. and Japanese stock markets and to investigate the impacts of economic policy uncertainty indices on volatility cycle dynamics. Empirical results show that: (i) the joint behavior switches between synchronous and asynchronous patterns; (ii) there is evidence for an asymmetric impact of the uncertainty index on conditional variance for the U.S. market, but not for the Japan market; and (iii) a correlation asymmetry with respect to synchronous and asynchronous patterns is present.