Nexus among Economic Policy Uncertainty, Stock Returns and Macroeconomic Variables- New Evidence from Developing Country’s Stock Market using NARDL Cointegration Approach

Abstract

Uncertainty generates hype which creates difficulty to predict the returns in the stock market. To answer this phenomenon this study is carried out which aims to investigate the nexus of Economic Policy Uncertainty with Stock Return having macroeconomic variables as controlled in Pakistan over the period of 2010 to 2022. A novel technique non-linear ARDL (NARDL) co-integration statistical approach to estimate and explore the asymmetric effect has been employed. The findings of this study show that there is significant long-term co-integration exists between shifts in Economic Policy Uncertainty with stock returns in Pakistan. We also found the short-run and long-run shocks (Positive and Negative) of EPU have a significant effect on the stock return along with the exchange rate and consumer price index. This means high uncertainty in economic policy can decrease the stock returns and low uncertainty (means high certainty) can increase the stock returns in Pakistan. More interestingly, we found an asymmetrical relationship between SEPU with stock returns which means no symmetry or no linearity in the relationship. Concisely, inflows from positive EPU shocks have a long-term negative impact on stock returns and negative EPU inflows shocks have a long-term positive impact on stock returns in Pakistan. To overcome political instability, stock market declines, rising of inflation, and currency devaluation this study can be useful for policymakers, the Government, regulatory authorities, investors, the equity market, and so forth .