Economic Policy Uncertainty Shocks Research Articles

Comparative responses of renewable energy stock market to economic policy uncertainty and climate policy uncertainty shocks: Evidence from China

AbstractWith rising climate policy uncertainty (CPU) and economic policy uncertainty (EPU), it is crucial to analyze the factors influencing the renewable energy stock market (RE) from a comprehensive perspective. Using data from January 2009 to May 2022, we use a time‐varying parameter vector autoregressive model with stochastic volatility (TVP‐VAR‐SV) to examine CPU, EPU, macroeconomic factors, and RE in a unified framework. We analyze the various responses of RE to CPU and EPU. Furthermore, we test for differences in the impact of the four classifications of EPU on RE. The findings are as follows. The time‐varying impact of CPU on RE is centered on the short term and is positive during non‐crisis periods. In contrast, the impact of EPU on RE is negative in the short term. In addition, causal identification at the micro level reveals that RE can increase by 0.932% on average after being affected by CPU. Further comparing the four classifications of EPU, we find that exchange rate policy uncertainty has the largest negative impact. Our study enriches the investment theory on RE. It avoids biased interpretations of various policy uncertainties and has a significant implication for policymakers, renewable energy firms, and investors.

Economic policy uncertainty and Indian equity sectors: a quantile regression approach

Purpose This paper aims to investigate the effect of economic policy uncertainty (EPU) shocks on Indian equity market sectors. The effect of domestic (Indian) and foreign (USA) EPU shocks is examined on ten major Bombay Stock Exchange sectors. Design/methodology/approach The study uses data covering the period from September 2005 to July 2023 and uses the methodology of quantile regression to investigate the heterogenous response of stock market sectors under diverse market conditions explained through the analysis of conditional quantiles distribution. Findings The results demonstrate that domestic and foreign EPU shocks negatively affect most of the sectors in bearish market conditions. Industrials, commodities, utilities, consumer discretionary and financial services are the most affected sectors by domestic EPU. However, the information technology sector is found to be immune to domestic EPU shocks but negatively affected by foreign EPU shocks. On the other hand, energy, financial services and fast-moving consumer goods sectors are found to be immune to foreign EPU shocks but are negatively affected by domestic EPU shocks. Practical implications Understanding the heterogeneous response of different sectors to EPU shocks could help investors and portfolio managers identify portfolio diversification opportunities. Originality/value This study makes an inaugural attempt to examine the responses of Indian stock market sectors to domestic and foreign EPU shocks using the approach of quantile regression and unveils the previously unexamined diverse reactions of Indian stock market sectors to EPU shocks originating from both India and USA.

Is cryptocurrency a new digital gold? Evidence from the macroeconomic shocks in selected emerging economies

PurposeThe purpose of the study is to analyze the hedging abilities of the cryptocurrencies vis-à-vis gold against macroeconomic shocks in four emerging economies, India, China, Brazil and Russia.Design/methodology/approachUsing the monthly data from January 2013 to April 2023, the paper analyses the response of Cryptocurrencies vis-à-vis gold prices to three different macroeconomic shocks, namely, the economic policy uncertainty shock, the financial uncertainty shock and the inflation shock, within a VAR framework with the help of the Generalized Impulse Response Function.FindingsBoth gold and cryptocurrencies have limited hedging abilities against macroeconomic shocks across countries. In India, bitcoin has become the new digital gold, while in China, it is not bitcoin but rather gold that retains its hedging abilities. Neither bitcoin nor gold, Binance Coin or Cardano, are found to be the new digital gold in Brazil and Russia.Originality/valueThe paper compares the top nine cryptocurrencies with the traditional asset gold in terms of their hedging potential against macroeconomic shocks in emerging countries.

CAN GREEN BONDS DIVERSIFY ECONOMIC AND CLIMATE POLICY UNCERTAINTY?

The severe challenges posed by the environmental crisis and climate change have stimulated the development of the green bonds (GB) market aimed at providing bridging financing for carbon reduction. This investigation employs the wavelet-based quantile-on-quantile method to probe the asymmetric impacts among economic policy uncertainty (EPU), climate policy uncertainty (CPU) and GB. The empirical findings demonstrate that EPU and CPU have time-varying impacts on GB across different time scales. In the short term, the negative effects of EPU and CPU predominantly influence the GB market. In the long term, EPU and CPU have positive effects on the GB market during bullish market conditions but negative effects during bearish market conditions. These outcomes indicate that GB cannot always be deemed a diversifier for EPU and CPU shocks. These outcomes deviate from the Intertemporal Capital Asset Pricing Model (ICAPM) model’s conclusions, which emphasize uncertainties’ positive influence on the GB market. Policymakers can incorporate these findings into policy design to mitigate risks stemming from uncertainty and promote the GB market growth. Furthermore, investors should consider the effects of uncertainty to optimize their investment strategy and obtain higher returns.

Exploring the relationship between China's economic policy uncertainty and business cycles: Exogenous impulse or endogenous responses?

This paper explores China's endogeneity of economic policy uncertainty (EPU). Previous studies have disagreed on the causal relationship between uncertainty and the business cycle. By using shock-based restrictions, we identify structural shocks and investigate the endogeneity of China's EPU index. The findings suggest that an increase in EPUs is more likely to cause fluctuations in the Chinese economy than the reverse. The paper also uncovers spillovers of China's EPU on the US EPU, indicating a national strategy at play. In the long run, EPU shocks in China account for at least 22% of China's economic activity variation and 30% of the US EPU variation. These findings remain consistent when accounting for the COVID-19 period, adopting heteroskedasticity identification schemes, and using alternative EPU indexes.

Economic policy uncertainty and geopolitical risk: evidence from China and Southeast Asia

This paper investigates the connectedness between China's economic policy uncertainty (EPU) and the geopolitical risk (GPR) of the countries in the Association of Southeast Asian Nations (ASEAN) using quantile time‐varying parameter vector autoregression. The empirical results indicate that China's EPU becomes a net risk transmitter at the median quantile, demonstrating that ASEAN countries' GPR is vulnerable to China's economic shocks. Furthermore, extreme events such as COVID‐19 amplify the connection between EPU and GPR, leading to a higher total connectedness index value. Moreover, the pairwise spillover effect analysis reflects that the risk launcher effect of China's EPU is longer and more prominent for Thailand and the Philippines than for Malaysia and Indonesia, which enriches the hypothesis. The contributions are as follows. This paper selects emerging China as the research object and first discusses its economic influence on neighbouring countries. In addition, fully analysing the heterogeneous spillover effects of EPU on the GPR of different countries makes our suggestions diversified and practical. Therefore, improving recognisable ability and institutional quality will promote ASEAN countries to mitigate their vulnerability to China's EPU shocks. Meanwhile, China's government should quickly respond to external uncertainties, prudently adjust economic policies, and avoid large swings of EPU volatility.

Fund Flows, Stock Markets, and Economic Policy Uncertainty: From the Perspective a CIVET Nation

ABSTRACT We investigate the relationships among economic policy uncertainty (EPU), equity fund flows (EFF), and the Colombian stock market. Results show adverse impacts of domestic, global, and regional EPUs on Colombia’s stock returns and EFF. Global and regional EPUs transmit to Colombian EPU which makes the market vulnerable to uncertainty shocks. A global EPU shock reduces returns by 2.2% the following month, raises Colombian EPU by 12%, and reduces EFF by 0.24%. Furthermore, heightened EPU increases liquidity and reduces stock returns. Our results suggest a feedback loop where uncertainty shocks increase trading, fuel domestic uncertainty, and reduce equity prices.

Asymmetric effects of economic policy uncertainty and exchange rates on international air travel demand: The case from Hong Kong

Despite the growing body of literature on economic policy uncertainty (EPU) and exchange rate, the potential nonlinear effects of EPU and exchange rate on international air travel demand have been largely neglected. This study aims to investigate the asymmetric effects of EPU and exchange rate on inbound air travel demand in Hong Kong from nine markets (Taiwan, Korea, Japan, Singapore, the UK, Malaysia, Indonesia, Canada, and India). Using monthly data from January 2002 to December 2021, the nonlinear estimation results revealed that EPU has a significant asymmetric long-run impact on air travel demand for Hong Kong, while its effect was negligible in the linear model. Travelers react strongly to EPU in response to rising uncertainty in economic policies, whereas they do not respond similarly to declining uncertainty. Rising uncertainty has a greater effect than falling uncertainty on travel demand from Taiwan, Korea, Japan, Canada, and India. Our findings support that travelers are loss-averse in their response to EPU shocks, providing important policy and managerial implications. This study also found that exchange rate changes have a nonlinear impact on air travel demand, reflecting travelers' asymmetric behavior in response to currency appreciation and depreciation.

How do sectoral Islamic equity markets react to geopolitical risk, economic policy uncertainty, and oil price shocks?

This study explores the impact of three major risk and uncertainty indices (Geopolitical Risk (GPR), Economic Policy Uncertainty (EPU), and Oil Market Volatility (OVX)) on the Dow Jones Islamic Market (DJIM) World and the ten major sectoral Islamic equity indices. The investigation further evaluates whether the impact of these uncertainties varies between Islamic sectoral indices and the global benchmark. Our time-varying analysis shows that most Islamic equity indices are more resilient in hedging against GPR and EPU shocks compared to OVX shocks. Furthermore, the Quantile-on-Quantile results establish a positive correlation between DJIM World and most Islamic equity indices with GPR, demonstrating their robust capabilities to hedge against GPR shocks. These hedging abilities are more pronounced in the consumer goods, oil & gas, and financial sectors. The dependence structures between extreme EPU shocks and the DJIM world and consumer goods, financials, healthcare, and industrial sectors are positive only in bearish conditions, suggesting hedging benefits are predominantly limited to lower quantiles. Yet, the basic materials and oil & gas sectors can hedge EPU shocks better than the DJIM world and other sectors, depending on market states. Notably, no Islamic equity indices show resilience against OVX shocks. Our findings have prominent portfolio risk management and policy implications for investors and policymakers. These findings hold significant implications for portfolio risk management and policy strategies for investors and policymakers.

Impact of economic policy uncertainty, oil prices, and technological innovations on natural resources footprint in BRICS economies

Domestic materials help people and the environment coexist. Since the Industrial Revolution, resource use has increased, so it's important to monitor how much resources are used to make intermediate or finished goods. The literature identifies several causes of resource depletion and environmental degradation. The study examines the asymmetric effects of technological advancements, economic policy uncertainty (EPU), and oil prices on material footprint (MFP). This study examined the relationship between oil prices, economic policy uncertainty, and technological innovation using consumption-based material footprints as a comprehensive indicator of human pressure on resources. Panel ARDL and Non-linear ARDL estimators were used to examine symmetric and asymmetric relationships for the BRICS economies from 1991 to 2022. The asymmetric model shows that economic policy uncertainty increases BRICS resource consumption. Positive or negative EPU shocks increase MFP, while oil price shocks lower MFP due to economic activity slowing due to rising oil prices. This is shown by the COVID-19 lockdown, which reduced oil consumption and improved the climate but halted all business. Technology innovations also have long-term and short-term effects. This shows that the BRICS region urgently needs innovative long-term technology, sustainable economic policies, and energy regulations for resource management.

Geopolitical risk and economic policy uncertainty: Different roles in China's financial cycle

This paper investigates the distinct roles of geopolitical risk (GPR) and economic policy uncertainty (EPU) in China's financial cycle and their high correlation. Our findings reveal that the impact of a GPR shock on China's financial cycle is more significant than that of an EPU shock. Furthermore, the direct effect of GPR shock is the primary contributor to China's financial cycle's impact, while the indirect effect of EPU shock mainly comes from pushing up GPR. We also note that the common shock is the primary driver of the indirect effects of GPR and EPU on the financial cycle, with minor lagged effects. Finally, in our time-varying analysis, we observe that after 2010, an EPU shock led to a downturn in China's financial cycle and had a more significant indirect impact than in any other period.

Economic policy uncertainty, geopolitical risks, and the heterogeneity of commodity price fluctuations in China ——an empirical study based on TVP-SV-VAR model

The combination of geopolitical conflicts and economic shocks could cause severe volatility in the global commodity market. Based on the monthly data from June 2006 to March 2023, this paper employs the TVP-SV-VAR model to investigate the time-varying impacts of economic policy uncertainty (EPU) and China's geopolitical risk (GPRC) on China's commodities prices (CCPI). The findings reveal that: (1) CCPI can be collectively influenced by EPU and GPRC shocks, with time-varying impulse responses showing notable fluctuations with alternating positive and negative values. The response of CCPI to EPU is more intense than that to GPRC shock after 2019; (2) Under the financial crisis, GPRC has a significantly positive impact on CCPI, while positive responses to global EPU and China's EPU are more pronounced under the Russia-Ukraine conflict. Under the Sino-US trade friction, the responses of CCPI to various shocks are mostly positive, with a continuing positive impact of EPU; (3) The responses of energy prices, agricultural product prices, and non-ferrous metal prices align with that of overall commodity prices. However, under the Russia-Ukraine conflict, the positive impulse responses of non-ferrous metal prices to EPU and GRPC shocks are persistent.

Asymmetries, uncertainty and inflation: evidence from developed and emerging economies

This paper examines the asymmetric impact of economic policy uncertainty (EPU) and oil price uncertainty (OPU) on inflation by using a Nonlinear ARDL (NARDL) model, which is compared to a benchmark linear ARDL one. Using monthly data from the 1990s until August 2022 for a number of developed and emerging countries, we find that the estimated effects of both EPU and OPU shocks are larger when allowing for asymmetries in the context of the NARDL framework. Further, EPU shocks, especially negative ones, have a stronger impact on inflation than OPU ones and capture some of the monetary policy uncertainty, thereby reducing the direct effect of interest rate changes on inflation. Since EPU shocks reflect, at least to some extent, monetary policy uncertainty, greater transparency and more timely communications from monetary authorities to the public would be helpful to anchor inflation expectations.

Cryptocurrencies in an uncertain world: Comprehensive insights from a wide range of uncertainty indices

AbstractThis study investigates the impacts of economic policy uncertainty on the Bitcoin market using the monthly data from January 2014 to December 2022. In so doing, six major uncertainty indices (Global Economic Policy Uncertainty, Equity Market Volatility, Twitter‐based Economic Uncertainty, Geopolitical risk index, The Cryptocurrency Policy Uncertainty Index, The Cryptocurrency Price Uncertainty Index), and in particular, two novel Cryptocurrency Uncertainty indexes as introduced by Lucey et al. (2022) are taken into account. Our findings uncover a negative connectedness between Bitcoin prices and the key selected uncertainty indices, suggesting that higher uncertainties result in lower Bitcoin fluctuation across time and frequency domains. Our results provide valuable information on constructing asset portfolios for investors who have investment strategies entailing Bitcoin since Bitcoin would be a diversifier under economic policy uncertainty shocks. Our results hold robust by using the alternative methodology.

Comparing the impact of Chinese and U.S. economic policy uncertainty on the volatility of major global stock markets

This study compares the impact of Chinese and U.S. economic policy uncertainty (EPU) (proxied by the EPU index) on the volatility of 11 major stock markets. Unlike previous research that only utilizes monthly EPU for such a comparison, this study uses both daily and monthly data to examine the impact within a month as well as over months. In order to provide a detailed analysis, EPU shocks are investigated from a two-sided viewpoint: one considering the effects of EPU indices as exogenous shocks, and the other examining the spillovers from EPU indices as endogenous variables. Meanwhile, the role of global turmoil, such as the 2007–2008 global financial crisis (GFC) and the COVID-19 pandemic, in influencing the impact of Chinese (or U.S.) EPU is highlighted. The results show that the impact of U.S. EPU is reinforced at both daily and monthly frequencies during the GFC, with a greater effect on the European stock markets. After the GFC, the rising influence of Chinese EPU is observed at a monthly frequency in several markets in Asia and elsewhere. Overall, the dynamic spillovers from the EPU indices to stock volatility suggest the dominant role of U.S. EPU in most markets at a daily frequency, while the extent of the spillovers is driven by turbulent events, including the GFC and the COVID-19 pandemic.

Asymmetric impact of economic policy uncertainty on cryptocurrency market: Evidence from NARDL approach

The study examines the relationship between cryptocurrency market and economic policy uncertainty (EPU) by concentrating on the top five cryptocurrencies assessed by market capitalization. We investigate long and short-run effects of global EPU on the returns of Bitcoin, Ethereum, Tether, Binance coin and Ripple, along with ascertaining asymmetries, through the NARDL (Non-Linear Autoregressive Distributed Lag) model, for the period ranging from September 2017 to August 2022. In the long run, except for Tether, all other cryptocurrencies are negatively affected by EPU, challenging the safe hedge properties of cryptocurrencies. However, Bitcoin, Ethereum, Binance coin and Ripple display positive relations with growing EPU in short run, reflecting their safe haven attributes over a shorter horizon. Additionally, these cryptocurrencies exhibit asymmetries in the short run. Further, we analyse the effect of US, Chinese and Indian EPU on bitcoin returns to understand the effect of EPU shocks of advanced and emerging economies. US EPU has long-run negative effects on bitcoin market, whereas Indian and Chinese EPU have no significant impact in long term. Moreover, our analysis also establishes the detrimental impact of the Indian government's crypto tax policy on bitcoin. The study has relevance for current and potential investors of the cryptocurrency market apart from the policymakers and regulatory bodies.

A note on international spillovers of economic policy uncertainty across business cycles: evidence from OECD countries

Abstract We estimate a smooth-transition vector autoregression model (ST-VAR) using panel data from 14 OECD countries to study the cross-country spillover effects of economic policy uncertainty (EPU) shocks. An unexpected elevation of EPU originating abroad has an overall contractionary real effect, and the spillover effects depend on the state of the business cycle of the recipient country. EPU spillover shocks during recessions have stronger but less persistent effects on a number of economic indicators. We also find that the interconnectedness of EPU, financial markets, and business confidence are important channels for the EPU shocks to propagate across countries, while the trade channel has limited effects, especially during expansions.

Foreign economic policy uncertainty shocks and real activity in the Euro area

Foreign economic policy uncertainty shocks and real activity in the Euro area

Spillover effects of economic policy uncertainty on adult and youth unemployment

Abstract The paper studies the effects of foreign (the US, the UK and the Chinese) and domestic economic policy uncertainty (EPU) shocks on unemployment in Germany, France, Italy and Spain. The analysis is run separately for the rates of adult and youth unemployment. Impulse responses derived from vector autoregressive models show that the magnitudes of the responses of the adult and youth segments of the labour market are quite different. Following an uncertainty shock, the youth unemployment rate increases significantly more than the adult unemployment rate. This is the case for France, Italy and Spain. The German labour market seems to be resistant to foreign (except Chinese) and domestic EPU shocks, while the remaining labour markets, foremost the Spanish and Italian ones, are susceptible to uncertainty shocks, especially to the US EPU shocks.

Economic Policy Uncertainty Shocks and Chinese Stock Market Volatility: An Empirical Analysis with SVAR

This paper proposes a framework for examining the interaction between stock market volatilities and economic uncertainty shocks, aiming to understand better the influence of economic uncertainty shocks on the Chinese stock market. The major empirical results include the followings. First, the economic policy uncertainty shocks push the Chinese stock volatility up, increasing the market risk. A 1-standard-deviation shock of economic policy uncertainty will enhance the stock volatility of the two composite indices by approximately 7% in 12 months. Second, the stock volatility reacted more intensely to fiscal and monetary economic policy uncertainty shocks, with a 1-standard-deviation shock that can enhance the stock volatility of the two composite indices by more than 10% in 12 months. Third, different stock indices exhibit different patterns of cumulative impulse responses, and the reaction of the volatility of the SSE real estate index to economic policy uncertainty shocks is more significantly intense than other indices. Besides, we have proved the robustness of empirical results by reestimating the models with a lag order of 2. Overall, our research results can provide policy and managerial insights for the sustainable development of the Chinese stock market and beyond.