Abstract
Rising political and economic uncertainty over the world affects all participants on different markets, including stock markets. Recent research has shown that these effects are significant and should not be ignored. This paper estimates the spillover effects of shocks in the economic policy uncertainty (EPU) index and stock market returns and risks for selected Central and Eastern European markets (Bulgaria, Czech Republic, Estonia, Hungary, Lithuania, Poland, Croatia, Slovakia and Slovenia). Based on rolling estimations of the vector autoregression (VAR) model and the Spillover Indices, detailed insights are obtained on the sources of shock spillovers between the variables in the system. Recommendations are given based on the results both for policymakers and international investors. The contribution of the paper consists of the dynamic estimation approach, alongside allowing for the feedback relationship between the variables of interest, as well as examining the mentioned spillovers for the first time for majority of the observed countries.
Highlights
The traditional asset pricing models developed in the last couple of decades include risk factors such as the market risk, value, size, momentum, and illiquidity as the mostly popular and used ones ([1,2,3,4,5]).Macroeconomic factors have been included over the years as well
Previous research has shown that the world and European uncertainty affect the Central and Eastern European (CEE) economies in a great way (e.g., Lithuania 92.5%, and other results in [70])
Since not all criteria indicated the same lag length for a country, the vector autoregression (VAR) model was estimated from the lowest lag length, multivariate tests of autocorrelation and heteroscedasticity have been performed and the lag length was increased until the null hypothesis for both tests could not be rejected
Summary
The traditional asset pricing models developed in the last couple of decades include risk factors such as the market risk, value, size, momentum, and illiquidity as the mostly popular and used ones ([1,2,3,4,5]).Macroeconomic factors have been included over the years as well (see [6,7,8]). The traditional asset pricing models developed in the last couple of decades include risk factors such as the market risk, value, size, momentum, and illiquidity as the mostly popular and used ones ([1,2,3,4,5]). Economic policy uncertainty has gotten attention recently once again. This is especially true after the global financial crisis in the late 2000s. There has been a growing bulk of literature which utilizes the EPU variable in explaining asset risk-return relationship ([11,12,13,14,15,16], etc.) which finds significant results—investors seek higher return due to economic policy uncertainty risk premium. Increases in EPU are related to stock return decrease and volatility increase ([13,17,18,19])
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