Economic Policy Uncertainty and Momentum: International Evidence.

Abstract

This paper analyzes whether country-specific or foreign Economic Policy Uncertainty (EPU) can explain time-series variation in momentum returns in some international stock markets. First, we empirically tested three EPU index series on the return of Long-Short portfolios of momentum-based strategy in the Brazilian market, a small and open economy, that may be influenced by a large economy like the United States. As proxies for economic policy uncertainty, we used the news-based index developed by Baker, Bloom, and Davis (2016), which one proxy is for Brazil and two is for foreign policy uncertainty, the US, and the global index. Consistent with our theoretical assumptions, we show that local momentum is stronger in months followed by low EPU, both domestic and foreign. Second, our empirical results indicate that foreign EPU has a more important role than the country-specific EPU on the Brazilian momentum strategy. Finally, analyzing 12 other countries we added new evidence that this relationship between local momentum and external EPU is not exclusive to the Brazilian market.