Monetary policy uncertainty and stock returns in G7 and BRICS countries: A quantile-on-quantile approach

Abstract

Using a quantile-on-quantile (QQ) approach, this study examines the heterogeneous and asymmetric effects of monetary policy uncertainty (MPU) on stock returns in Group of Seven (G7) countries and the BRICS countries. An overall negative effect of MPU is observed on stock returns in most countries, especially in the area that combines higher quantiles of MPU with lower quantiles of stock market. The results show that higher uncertainty decreases stock returns when the stock market suffers a crash. A positive market response to MPU shocks can also be found in the lower quantiles of MPU, suggesting that uncertainty can boost stock performance as well. Finally, this study shows that the market responses to MPU shocks in the G7 countries seem more volatile than in the BRICS countries. In sum, this study reveals the response of stock market at different quantiles to different degrees of monetary policy uncertainty, presenting a complete and precise picture of the overall inter-dependence between stock returns and MPU.