Abstract
Economic policy drives investment, production, employment, and other macroeconomic indicators of the economy. The study examines the equity, commodity, interest rates, and currency markets, taking into consideration the US economic policy uncertainty (EPU) index. The present work determines the association among policy uncertainty and volatility index, expressed in terms of generalized autoregressive conditional heteroscedasticity and period of empirical work spanning from 2000 to 2018. The results suggest that equity markets’ volatility tends to be very high based on a high degree of policy uncertainty. The findings on the commodity market indicate that crude oil and gold prices remain more volatile during the presidential election and financial crisis. One of the essential results shows that the 2000s boom, early credit crunch, Lehman’s collapse and recession, and fiscal policy battles have significantly affected the equity, currency, and commodity markets. The interest rates and currency markets have responded considerably to Feds’ and EPU index. The empirical outcome provides evidence that implied volatility index is a forward looking expectation of future stock market volatility, and it uncovers that policy uncertainty affects investor sentiment. The present work holds some practical implications for the government to formulate policies to regulate the US market.
Highlights
The Chicago Board Options Exchange’s (CBOE) has recently completed 25 years as an exchange for trading into options
Baker et al (2016) developed a new index of economic policy uncertainty” (EPU) based on newspaper archives – that is, the economic and financial keywords such as “economic/ economy”, “uncertain/uncertainty”, “congress”, “deficit”, “federal reserve/Federal Open Market Committee [FOMC]”, “gross domestic product”, “legislation/regulation” and “Whitehouse”, etc. that frequently appear in the newspaper and online portals
The positive statistically significant coefficient ranges from 5% to 21% imply that policy uncertainty and lack of information about future macroeconomic outcomes cause a substantial increase in the future stock market volatility
Summary
The Chicago Board Options Exchange’s (CBOE) has recently completed 25 years as an exchange for trading into options. This study supplicates the opportunity to explain the behaviour of options’ implied volatility of different 14 markets of the US concerning “economic policy uncertainty” (EPU). The present work is the motivation to extend the effects of policy uncertainty on the VIX index across various asset classes. The study examines 14 implied volatility indices for the US equity, commodity, exchange rate/currency, and treasury markets. Our study exclusively focuses on the impact of economic policy uncertainty on implied volatility index (VIX), across various asset classes for the US market. Our approach to explaining the future stock market volatility is novel in several aspects This is the pioneering attempt to analyse the investors’ sentiment, followed by the policy uncertainty index in the US markets. “Conclusions,” lists the conclusion and practical implications of the study
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