EPU Index Research Articles

Interconnections and contagion among cryptocurrencies, DeFi, NFT and traditional financial assets: Some new evidence from tail risk driven network

For digital assets (cryptocurrencies, DeFi tokens and NFTs) and traditional financial assets such as stock indices and commodities, this paper established a dynamic downside risk network to explore the network aggregating structure, important nodes and the tail risk spillover between asset groups. This study reveals that there exist tail risk spillover between digital financial assets and traditional financial assets, where the risk spillover between the digital assets and the commodities is bidirectional and the risk spillovers from the stocks to the digital assets as well as the commodities to stocks are unidirectional. For important assets, the NFT Decentraland and Brazil’s BVSP stock index play central roles in the network, while the FTSE stock index and gold exhibit strong hedging potential against global downside risk spillovers. Furthermore, we consider the impact of uncertainty in US economic policy and US stock volatility on tail risk contagion, which is the network aggregation level. Regarded as exogenous shocks, the US stock circuit breaker in March 2020 and the US Federal Reserve rate rising in March 2022 were found to significantly increase the tail risk contagion, especially the risk spillover from the stocks market to the digital financial market. Moreover, by using the TVP-SV-VAR model, we find that increases in the US EPU index and the US VIX index can both exacerbate the tail-risk contagion between digital and traditional financial assets. This expands the influencing factors of risk contagion between financial assets. The empirical findings carry important implications not only for portfolio managers and investors in portfolio allocation and investment strategies between digital and traditional financial assets, but also for government regulators in risk management and economic policy formulation.

Global Economic Policy Uncertainty and Corporate Investment: Empirical Evidence from Vietnam

The Economic Policy Uncertainty Index is an important indicator that influences the corporate financial and investment behavior of companies. In this study, the corporate investment behavior from 2018 to 2020 of 354 non-financial firms listed in Ho Chi Minh Stock Exchange is analyzed to determine how businesses respond to changes in the Global EPU index and to determine how Leverage, Cash flow, Tobin’s Q, Size, and Sales Growth affect business investment. In addition, the research also examined how corporate investment differs between state-owned companies and non-state-owned companies. The data was hand collected and analyzed by Pooled OLS Regression and Fixed-Effect Model through STATA software to determine the relationship between corporate investment and explanatory variables. The results of the study indicate that the correlation between corporate investment and the global EPU index is inversely proportional. This study also proves that the increase of leverage ratio is a factor that helps business investment growth.

Who Avoids More? A Cross-country Evidence of Economic Policy Uncertainty and Tax Avoidance

Tax avoidance is a complex problem faced by governments in both developed and developing countries. This study aims to examine the effect of Uncertainty of Economic Policy (EPU) on tax avoidance and see the tendency of higher tax avoidance practices based on the level of the country's economy. This research uses a quantitative approach with an explanatory method. The study sample consisted of 21 purposively selected countries. Data was collected between 1997 and 2015. The data collection method is carried out through secondary data collection from various relevant sources, such as the UNU-WIDER Government Revenue Dataset 2021 and the EPU index of related studies. Data analysis was performed using panel data regression techniques with the help of Eviews 9 software. The results of the analysis showed a significant negative influence between EPU and tax avoidance. In addition, it was also found that developed countries have higher rates of tax avoidance than developing countries. This research provides new understanding for tax authorities in dealing with EPU in order to formulate appropriate policies to reduce tax avoidance practices. The implication of this study is the need for more effective preventive and regulatory measures in tackling tax avoidance in various countries.

Research on Alternative Fuel Vehicle Fluctuation Based on GARCH-MIDAS Model

This article uses the GARCH-MIDAS model to analyze the impact of economic uncertainty on the volatility of the new energy vehicle market. Economic uncertainty includes economic policy uncertainty and macroeconomic uncertainty. Use EPU as the proxy variable for economic policy uncertainty, and the Manufacturing Purchasing Managers Index (PMI) as the proxy variable for macroeconomic uncertainty. The results indicate that economic policy uncertainty has a significant negative impact on the volatility of the new energy vehicle market. The PMI index's impact weight on the new energy vehicle sector has slowly decreased over the past 12 months, indicating that the macroeconomic indicators of the manufacturing industry have a relatively long impact on the new energy vehicle sector, which takes about a year to dissipate, The fluctuation of economic policy uncertainty on the new energy vehicle market is transmitted through the EPU index, and the impact of economic policy uncertainty presents a short-term effect. Policy shocks are absorbed within 2 months and will not have a long-term impact on the stock market. Among all economic uncertainty factors, economic operation has the most significant impact on long-term volatility. Overall, macroeconomic uncertainty does not have a significant impact on the volatility of the new energy vehicle market, and its contribution is limited.

Causality Relationship Between Global Risk Indicators and BIST-Tourism Index

The aim of the study is to examine the causal relationship between the VIX index, oil price, dollar index, and BIST-Tourism index in the context of the global EPU between February 1997 and September 2022. To achieve this aim, the Fourier Toda Yamamoto (TY) causality test and the fractional Fourier TY causality test were used. The Fourier TY causality test results show that there is a one-way causative relationship between the dollar index and the BIST-Tourism index, between the VIX index and the global EPU index, and between the dollar index and oil price. In addition, it is seen that there is a bidirectional causal relationship between the dollar index and the global EPU index. According to the results obtained from the fractional Fourier TY causality test, there is a bidirectional causal relationship between BIST-tourism and global EPU and between BIST-tourism and oil price. In addition, a one-way causality relationship was found from the VIX index to the BIST-Tourism index, from the dollar index to the BIST-Tourism index, from the global EPU to the VIX index, and from the oil price to the dollar index. These results show that the shocks are permanent.

Impact of policy uncertainty on gold price in India: evidence from multi commodity exchange (MCX) India and World Gold Council prices

ABSTRACT India is one of the largest consumers of gold but remains largely unexplored and requires proper attention from investors, regulators and policymakers. Our study aims to uncover the relationship between policy uncertainty and gold prices in India, considering a timeline from 2004 to 2023. Using India EPU and geopolitical uncertainty-related index, the empirical estimation was performed in a time series framework using standard OLS and augmented regression using data from MCX-India and WGC prices. Our statistical investigation signals that policy uncertainty and gold prices in India are positively associated. This implies a higher degree of policy uncertainty and a higher gold price. Monetary policy uncertainty and interest rate changes shows an asymmetric impact on the gold price in India; the effects were more pronounced after 2015. Furthermore, policy uncertainty contains information explaining gold futures prices and has a two-month lag impact. Thus, gold trading in India is sensitive to the economic outlook of the economy and policy uncertainty. Gold imports in India have an adverse effect on gold prices. It is also reported that the INR/USD exchange rate plays a vital role in gold price setting. Hence, the study suggest that India’s government should develop a healthy gold ecosystem and gold-policy.

Economic policy uncertainty and fund flow performance sensitivity: Evidence from New Zealand

AbstractUtilizing a large sample of actively managed equity funds and a recently developed EPU index for New Zealand, we show that fund flow performance sensitivity decreases with policy uncertainty. The role of policy uncertainty as a determinant of fund flow performance sensitivity is found to be stronger, particularly for funds with global focus, large sized funds, high momentum funds and those with high idiosyncratic volatility and low downside risk. The findings support the argument that high policy uncertainty dampens investors' ability to process information that allows them to distinguish fund manager skill from luck. The results remain strong after accounting for various macroeconomic factors.

Sino-US Economic Policy Uncertainty and Spillover Effect of Asset Price Volatility in China

By constructing a TVP-VAR-DY model, this paper investigates the dynamic spillover effect of Sino-US economic policy uncertainty on China's asset price volatility. The study finds that Sino-US EPU is the net exporter of China's asset price volatility spillover effect, and the net spillover effect of Sino-US EPU on China's asset prices volatility deviates from the EPU index trends of the respective countries. EPUs in China and the United States are observed in a state of mutual spillover. The network structure of the net spillover effect of asset price volatility between China and the United States shows a dynamic evolutional trend, and the spillover effect of EPU index on asset price volatility in China is heterogeneous in different periods and different levels.

On the volatility of WTI crude oil prices: A time-varying approach with stochastic volatility

This study investigates the impacts of crude oil-market-specific fundamental factors and financial indicators on the realized volatility of West Texas Intermediate (WTI) crude oil price. A time-varying parameter vector autoregression model with stochastic volatility (TVP-VAR-SV) is applied to weekly data series spanning January 2008 to October 2021. It is found that the WTI oil price volatility responds positively to a shock in oil production, oil inventories, the US dollar index, and VIX but negatively to a shock in the US economic activity. The response to the EPU index was initially positive and then turned slightly negative before fading away. The VIX index has the most significant effect. Furthermore, the time-varying nature of the response of the WTI realized oil price volatility is evident. Extreme effects materialize during economic recessions and crises, especially during the COVID-19 pandemic. The findings can improve our understanding of the time-varying nature and determinants of WTI oil price volatility.

Frequency dependence between oil futures and international stock markets and the role of gold, bonds, and uncertainty indices: Evidence from partial and multivariate wavelet approaches

This paper examines the frequency dynamic co-movements between crude oil prices and stock market returns of three developed economies (Canada, Japan, and the USA) and the emerging BRICS (Brazil, Russia, India, China, and South Africa) economies by considering four global factors (U.S. treasury bills, S&P volatility index, gold price, and U.S. EPU index). Using bivariate and multivariate wavelet approaches, the results show evidence of time-frequency co-movements between the considered markets at medium and low frequencies. Besides, the results reveal that the co-movement is intensified during global financial crisis and COVID-19 pandemic periods, confirming recoupling hypothesis. The risk analysis reveals dependence and persistence of co-movements, and aggravation of portfolio risk in the BRICS economies and across markets during bouts of afflictions. These findings should encourage the relevant national and transnational policy makers to consider these co-movements which vary over time and in duration when setting up regulations that deem to enhance the market efficiency.

Forecasting Chinese stock market volatility under uncertainty

As the trend of world economic integration intensifies, global uncertainty also has a certain impact on the stock markets of various countries. To explore the volatility of China's stock market under uncertainty, we use a mixed-frequency data model and introduce uncertainty variables, namely the Global Economic Policy Uncertainty Index (GEPU), the United States (US EPU) and China (Chia EPU) economic policy uncertainty indices, the implied volatility index (VIX) and the geopolitical risk index (GPR), to build an extended GARCH- MIDAS model to analyse the impact of uncertainty indices on Chinese stock market volatility. The empirical results show that, except for the US EPU index, all other uncertainty indices have some impact on the Chinese stock market, and the out-of-sample forecasting results indicate that the introduction of these variables improves the forecasting effect of the model, with China's economic policy uncertainty index showing significant advantages in forecasting both weekly and monthly volatilities.

Category-specific EPU indices, macroeconomic variables and stock market return predictability

This paper mainly investigates whether the category-specific EPU indices have predictability for stock market returns. Empirical results show that the content of category-specific EPU can significantly predict the stock market return, no matter the individual category-specific EPU index or the principal component of category-specific EPU indices. In addition, the information of category-specific EPU indices can also have higher economic gains than traditional macroeconomic variables, even considering the trading cost and different investor risk aversion coefficients. During different forecasting windows, multi-period forecast horizons and the COVID-19 pandemic, we find the information contained in category-specific EPU indices can have better performances than that of the macroeconomic variables. Our paper tries to provide new evidence for stock market returns based on category-specific EPU indices.

How Does Economic Policy Uncertainty Affect Momentum Returns? Evidence from China

Economic policy uncertainty has been identified as a new macroeconomic risk factor that harms the stock market’s profitability. This paper examines the impact of the Chinese EPU levels on one of the most famous financial anomalies—momentum returns. A new EPU index based on mainland China newspapers is used to obtain more accurate EPU–momentum relations. We selected 3958 Chinese listed companies’ stocks from 2011 to 2022 to establish time-series (TSM) and returns signal momentum strategies (RSM). Although the momentum effect in the Chinese stock market is weak, the EPU-based dynamic-threshold RSM strategies yield significant positive excess returns: eight times more excess returns than conventional fixed-threshold strategies. We used the ordinary least squares regression model (OLS), and the event study method only identified robust negative EPU–momentum relationships in the Chinese stock market during high-EPU stages. Surprisingly, the negative relationship between EPU and momentum returns turns positive during expansion cycles. We explain this phenomenon as follows: expansions increase Chinese investors’ confidence, and uncertainties reduce market manipulations.

Economic policy uncertainty and institutional investment returns: The case of New Zealand

This study introduces a monthly news-based economic policy uncertainty index for New Zealand (NZ EPU) and examines the pricing implications of NZ EPU on a large sample of institutional investors. We find that NZ EPU is a priced and an undiversifiable risk factor that commands a statistically and economically significant risk premium of 6.23% on annual basis in the cross-section of managed fund returns. Interestingly, despite the fact that about 70% of the funds in our sample adopt a global focus, our tests show that local uncertainty plays a more dominant role as a driver of institutional investment returns compared to global policy uncertainty. We show that funds with lower (higher) sensitivity to NZ EPU index generate significantly higher (lower) subsequent excess returns, even after controlling for the well-established systematic risk factors and fund level determinants. Further analysis suggests that NZ EPU betas are highly persistent and can predict short- and long-term returns up to 12 months, implying that active fund managers can devise an active timing strategy by tracking changes in the NZ EPU index. Our findings present important implications for policy makers and investors as the proposed NZ EPU index is able to capture both global and local shocks, while it aligns well with the overall trends in the business outlook surveys.

Nonlinear analysis of economic policy uncertainty: Based on the data in China, the US and the global

In this paper, we investigate the chaotic behavior and multi-fractal features of economic police uncertainty in China, the US and the global. Furtherly, we analyze the nonlinear correlations and interactions of the three EPU indices. Our results show that, the EPU indices in China, the US and the global have nonlinear characteristics of chaos and multifractality. As the world’s first and second largest economies, the US and China have significant interactions in their EPU indices and there are significant mutual influence between EPU indices in China, the US and the global. However, after China became the world’s second largest economy, the chaos of China’s EPU has increased, while that of the US has decreased; The nonlinear correlation of EPU between China and the global has increased significantly, while that between the US and the global has decreased significantly; There is a significant interaction of EPU index between China and the global, while the EPU index of the US is no longer affected by the global. These phenomena are closely related to the strategy pursued by China and the US.

Uncertainty and oil volatility: Evidence from shrinkage method

Prior studies argue economic policy uncertainty index (EPU) can successfully predict oil price volatility. This paper mainly sheds light on the forecasting ability of categorical EPU indexes for both WTI and Brent oil futures. To illustrate this problem, we extend the LASSO model with Markov two-stage regimes (MS-LASSO model) to better fit the nonlinear feature of oil volatility dynamic. Our empirical results provide empirical evidence that EPU index not only contains predictive information content for WTI and Brent oil volatility, but achieves higher realized utility. Notably, we find that the predictive ability of categorical EPU indexes is asymmetric through global financial crisis, business cycle and different market conditions. Additionally, the uncertainty index of sovereign debt and currency crises is the most frequent predictor selected by shrinkage method for both WTI and Brent oil volatility.

The asymmetric impact of oil price shocks on economic uncertainty: evidence from the asymmetric NARDL model

AbstractThe aim of this article is to investigate the asymmetric effects of the oil price on economic policy uncertainty for the period from January 1997 to May 2021 using a non‐linear autoregressive distributed lag approach. The results of the bounds test indicate that there is a long‐run equilibrium relationship between the economic uncertainty index and oil price. Furthermore, we conclude that the long‐run equilibrium relationship is a usual logical relationship and not a degraded relationship. The results of the asymmetric effects in the short and long term also showed that the positive and negative shocks to oil prices have an asymmetric effect on the EPU index. In addition, the negative shock may have a greater absolute effect in the long run. Our results are important to both investors interested in the oil market, as well as for policymakers.

The Cross-Correlations between Foreign Flows in Chinese A-Share Markets and Uncertainties in Home Markets

This paper investigates the cross-correlations between the foreign flows in A-share market and the uncertainties of market, economy, and policy in home markets, namely, the VIX index and the US EPU index. By employing the cross-correlation statistics and MF-DCCA method, we find the existence of the cross-correlations between the foreign flows and the VIX index, the foreign flows, and the US EPU index from qualitative and quantitative perspectives, respectively. For the cross-correlation between the foreign flows and VIX, small fluctuations are persistent, while large fluctuations are antipersistent. In contrast, the cross-correlation between the foreign flows and US EPU is antipersistent and steady. These results are robust by dividing the foreign flows into two parts in Shenzhen and Shanghai stock exchanges, respectively, and by shortening the periods to after the implementation of Shenzhen-Hong Kong Stock Connect.

A century of Economic Policy Uncertainty through the French–Canadian lens

A novel token-distance-based triple approach is proposed for identifying EPU mentions in textual documents. The method is applied to a corpus of French-language news to construct a century-long historical EPU index for the Canadian province of Quebec. The relevance of the index is shown in a macroeconomic nowcasting experiment.

The Impact of Foreign Exchange and Oil Prices Shocks on the Novel Google Trend Based Index of Economic Policy Uncertainty: A Case of Developing Country

Economic policy uncertainty is one of the remarkable issues in the literature in recent years. Since there is no such index for Turkey, Google Trend based novel economic policy uncertainty index (EPU) was created for the first time by this study. Then the impact of oil price and exchange rate on economic policy uncertainty in Turkey were measured by ARDL bound test. As a result of the analysis, a cointegration relationship was found between all series. In addition, while oil prices have a significant effects on EPU in the long-run, the long-run effects of exchange rates have not been observed. In the short-run, it is seen that 4% of the deviations occurring in brent oil in the long-run improved in the next period. The short-run Granger causality relationships between the examined variables were detected by Block Exogenous Wald test. The results obtained show a mutual causality between the USD / TL exchange rate and the index in the short-run, while a unidirectional causality from Brent oil to EPU index has been detected.