Abstract

AbstractWe show that a news‐based measure of economic policy uncertainty (EPU) negatively forecasts momentum. A 1‐standard‐deviation increase in EPU is associated with a 1.11% decrease in risk‐adjusted momentum returns. The predictive power of EPU is robust after controlling for previously documented economic state variables and macroeconomic uncertainty. We provide an explanation for these results from the perspective of a fund flow‐induced trading mechanism and offer direct empirical support. The literature documents that momentum can be partially attributed to performance‐chasing mutual fund flows. We find that this flow‐induced mechanism functions more effectively in low EPU states, thereby generating stronger stock momentum.

Full Text
Published version (Free)

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call