Abstract
This paper examines the efficient market hypothesis by applying monthly data for 15 international equity markets. With the exceptions of Canada and the U.S., the null for the absence of autocorrelations of stock returns is rejected for 13 out of 15 markets. The evidence also rejects the independence of market volatility correlations. The null for testing the absence of correlations between stock returns and lagged news measured by lagged economic policy uncertainty (EPU) is rejected for all markets under investigation. The evidence indicates that a change of lagged EPUs positively predicts conditional variance.
Highlights
The aim of this paper is to present empirical evidence to evaluate the efficient market hypothesis (EMH) by using economic policy uncertainty (EPU) as a news variable
Departing from conventional approaches that have focused on risk variables derived from financial market (Bali et al 2009; Chen et al 2018)1, this study employs a broader definition of news variables by including consideration for EPU, which contains information of social event, political risk, or headline commentary news that can influence stock market
By employing the monthly data to test the news-based EPU indices (Baker et al 2016; Davis 2016) on stock returns, this study finds that EPUs are positively correlated with stock returns beyond the current period, which allows us to reject the EMH and suggests the existence of an uncertainty premium
Summary
The aim of this paper is to present empirical evidence to evaluate the efficient market hypothesis (EMH) by using economic policy uncertainty (EPU) as a news variable. A successful empirical finding from this study will help to inform investors of whether market damage is continually worsening or if they are to be rewarded by an uncertainty premium. Departing from conventional approaches that have focused on risk variables derived from financial market (Bali et al 2009; Chen et al 2018) , this study employs a broader definition of news variables by including consideration for EPU, which contains information of social event, political risk, or headline commentary news that can influence stock market. The results will be enriched by using EPU innovations to derive empirical regularities that can provide insight to investors about the stock return behavior. Headline news on 10 October 2018 that the Nasdaq index suddenly dropped
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