Impact of economic policy uncertainty on the stock markets of the G7 Countries:A nonlinear ARDL approach

Abstract

This paper employs the linear and nonlinear ARDL models to examine the short-run and long-run effects of Economic Policy Uncertainty (EPU) on the stock prices of the G7 countries using monthly data up to May of 2021. Using the linear ARDL model, the results indicate that EPU has a significant negative short-run effect on the stock prices of all the G7 countries. These negative short-run effects last into the long-run in only Canada and Japan, with no long-run effect in the remaining countries. However, using the nonlinear ARDL model shows that at least one of the partial sum processes of positive and negative changes in EPU has a significant short-run effect on the stock prices of all the G7 countries, and that these short-run effects last into the long-run in all the G7 countries, except in the UK. Moreover, we find evidence of asymmetries in both the short-run and long-run in all the countries, except in the UK. Our findings have important policy implications.