Abstract
This paper examines the impact of changes in economic policy uncertainty (EPU) and COVID-19 shock on stock returns. Tests of 16 global stock market indices, using monthly data from January 1990 to August 2021, suggest a negative relation between the stock return and a country’s EPU. Evidence suggests that a rise in the U.S. EPU causes not only a decline in a country’s stock return, but also a negative spillover effect on the global market; however, we cannot find a comparable negative effect from global EPU to U.S. stocks. Evidence suggests that the COVID-19 pandemic has a negative impact that significantly affects stock return worldwide. This study also finds an indirect COVID-19 impact that runs through a change in domestic EPU and, in turn, affects stock return. Evidence shows significant COVID-19 effects that change relative stock returns between the U.S. and global markets, creating a decoupling phenomenon.
Highlights
This paper presents empirical evidence on 16 stock market indices that relates stock index returns to uncertainty factors for a sample period from January 1990 to August2021
States (US), Canada (CA), France (FR), Germany (GM), Italy (IT), the United Kingdom (UK), and Japan (JP); Asian markets for China (CN), India (IN), South Korea (KO), and Singapore (SG); Latin America markets for Brazil (BR), Chile (CE), Columbia (CO), and Mexico (MX). Selection of these countries was mainly constrained by the availability of economic policy uncertainty (EPU) and equity market volatility for infectious diseases (EMV) indices provided by Baker et al (2016) and
Notes: The dependent variable is national stock returns, Rit, ∆EPUt is the change in logarithm of the economic policy uncertainty, dy is dividend yield in natural logarithm, and ∆Vid,t is the change in natural logarithm of equity market volatility calibrated to infected disease uncertainty (Baker et al 2019)
Summary
This study is motivated by two streams of empirical studies: one that stems from a news-based measure of economic policy uncertainty (EPU) and another from analyses of the magnitude of COVID-19 pandemic on stock markets. Even though empirical studies on an uncertainty–return relation have been conducted, the focus is mainly on U.S economic policy uncertainty (EPU) and its impact on stock returns or volatility in a particular country. Information derived from a multi-variant and multi-country analysis has been limited This paper integrates both streams of thought by incorporating both EPU measure and the COVID-19 effect into a unified framework. EPU in this study is a composite of information for a trio of terms {E, P, U}, whereas Vid,t is the volatility attributed to infectious disease uncertainty These indices reflect journalists’ forward-looking perspective on the news of economic activities, policy stances, volatility, and uncertainty phenomena.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
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 callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
