Global Policy Uncertainty Research Articles

Global uncertainties and stock returns under heterogeneous market conditions: Evidence from wavelet coherence analysis

Over the years, the world has faced numerous global uncertainties, each leaving a profound impact on the global economy and the financial market. This has increased the research on how these uncertainties affect various stocks. However, limited attention has been directed toward comprehending the combined influence of geopolitical risk, global policy uncertainty, and infectious disease equity market volatility on heterogeneous stock returns. This study sets out to investigate the impact of geopolitical risk (GPRH), global policy uncertainty (GPU), infectious disease equity market volatility (ID-EMV), and their correlations on stock returns in a heterogeneous market context, employing wavelet coherence analysis. The study's outcomes emphasize the temporal nature of these uncertainties’ effects on financial markets. Furthermore, our research shows that there is a stronger influence on stock returns from various markets when the combined effects of GPU, ID-EMV, and GPRH are taken into account than when the effects are taken into account separately. This implies that times when all of these factors are operating concurrently will see greater fluctuations in markets than times when only one of them acts in the market. The findings of the study provide significant insight into the complex relationship between economic indicators and stock market performance, allowing investors and policymakers to gain a better understanding of the dynamics of global financial markets.

Dynamics Relationship of ASEAN-Financial Center Stock Market Valuation: A Cointegration Study

"This study investigates dynamic relationship of stock market valuation between ASEAN and financial center. Dynamic relations between stock market valuation reflects fundamental changes in stock that are driven by common global factors across markets. We model the relations in form of error correction model using two popular valuation proxies: Price to Earnings (PE) and Price to Book value (PB) with growth differential, inflation differential and global policy uncertainty index as the control variables. We estimate the model using the methodology developed by Kripfganz and Scheneider (2018) on a monthly dataset of 5 ASEAN countries and 4 financial centers between March 2010 to December 2021. We find positive and highly significant long-run relations and error correction mechanisms between ASEAN stock market valuation and those of financial center. The pattern is quite varied at country level perhaps due to country specific characteristics."

Global policy uncertainty and working capital management: Does national culture matter?

We explore the influence of global economic policy uncertainty on firms' working capital decisions and examine the moderating role of national culture, specifically uncertainty avoidance, on this link. Drawing on institutional theory, we contend that firms are influenced by their institutional environment's implicit and explicit traits and examine how policy uncertainty affects working capital allocation. Using a large panel of global firms across sixteen countries with over 150,000 firm-year observations and employing contemporary analytics, we find a positive association between policy uncertainty and working capital days, highlighting the need for proactive financial planning during periods of uncertainties. Our findings reveal that a one-standard-deviation increase in policy uncertainty is associated with an increase in working capital days by an average of seven days. Moreover, we find a significant negative moderating effect of uncertainty avoidance, demonstrating that firms in high uncertainty avoidance societies adopt more conservative working capital management strategies during periods of heightened uncertainty. These findings emphasize the importance of considering institutional and cultural factors when optimizing working capital practices during uncertain times. The effect of policy uncertainty is shown to be persistent. Additional heterogenous evidence through the lens of dividend policy, cash reserves, and firm size are offered.

Whose trade flows are affected by Global Policy Uncertainty? asymmetric evidence from G7

Whose trade flows are affected by Global Policy Uncertainty? asymmetric evidence from G7

Global economic policy uncertainty and oil futures volatility prediction

This paper mainly investigates whether the information of global policy uncertainty index (GEPU) index can predict oil futures volatility based on MIDAS-type models. The results show that GEPU can efficiently predict oil futures volatility. In addition, the MIDAS model with regime switching and GEPU can further improve the forecasting accuracy of the models. This paper tries to provide new evidence of global economic policy uncertainty for oil futures volatility.

Dynamic linkages between Islamic equity indices, oil prices, gold prices, and news-based uncertainty: New insights from partial and multiple wavelet coherence

This study examines the dynamic relationships between Islamic stocks, oil prices, gold prices, and global policy uncertainty. We used monthly data for the Dow Jones world Islamic stock index, oil prices, and global policy uncertainty from 1996M1 to 2018M12. We employed a cointegration approach, a discrete wavelet, a wavelet-based Granger causality test, a continuous wavelet, wavelet coherence, partial wavelet coherence, and multiple wavelet coherence. The findings of the study exhibit strong bi-directional Granger causality for both the original and decomposed series among the variables considered. Wavelet coherence revealed positive coherence between gold prices and Islamic stocks, negative coherence between gold prices and Islamic stocks due to global policy uncertainty, negative medium-run coherence between gold prices and oil prices during crisis periods, and positive coherence between oil prices and Islamic stocks. By adding new series, MWC always has a stronger correlation than PWC in the short, medium, and long term.

Economic integration and exchange market pressure in a policy uncertain world

This study examines the influence of economic integration, both real and financial, on exchange market pressure (EMP), along with considering external monetary and economic policy uncertainties. Our analysis is based on a group of Asian emerging markets over the period 2000–2018, which covers the global financial crisis and taper tantrum episodes, which have heightened monetary and economic policy uncertainty. By bringing improvements in modeling, and EMP measurement, a time series analysis shows an overall buffering role of real and financial integration on EMP, albeit with a country-level heterogeneity. Similarly, there is a country-level heterogeneity in the foreign exchange market response to monetary and economic policy uncertainties with surging effects in most cases. These results are supported by a panel analysis and remain robust during the global financial crisis. This research highlights that the current trend of deglobalization may hamper the stabilizing benefit of economic integration given the global policy uncertainty in the foreign exchange market.

Economic policy uncertainty and industry return predictability – Evidence from the UK

This paper examines whether local, regional, and global policy uncertainty shocks predict the sector returns of the UK stock market. Consistent with the market integration literature, we find global policy uncertainty shock is the major predictor of sector returns. Our second contribution is that the predictability of returns is dependent on the state of the business cycle. Finally, the evidence of predictability is strongest at the 6-month horizon, revealing that the impact of policy uncertainty shocks lasts for a few months. Our findings hold even after controlling for well-known risk factors and different sub-samples of data.

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.

Does corrupt practice increase the implied cost of equity?

We study the impact of a firm's corporate ethical failures on its implied cost of equity using a comprehensive firm-level data from 44 countries. We find that corrupt corporate behavior significantly leads to a higher implied cost of equity, and capital markets play a bigger role in disciplining corrupt firms when institutional quality is weak. Our results are robust with alternate specifications and measurements. Given the recent increase in policy uncertainty globally, we also examine whether the impact of corruption on the cost of equity depends on the level of global policy uncertainty. We show that corruption has a more significant impact on the cost of equity when policy uncertainty is high.

The Impact of Global Economic Policy Uncertainty, Geopolitical Risk and Oil Price on Stock Market: Evidence From Asean Countries

Using monthly data from January 1997 to July 2020, this study examines the impact of Global Economic Policy Uncertainty (GEPU), Geopolitical Risk (GPR), and oil price (WTI) on ASEAN stock exchanges such as the Jakarta Stock Exchange (JSE), Kuala Lumpur Composite Index (KLCI), Philippine Stock Exchange (PSI), Stock Exchange of Thailand (SET), and Vietnam Stock Index (VNI). We use a two-stage Markov switching model to model market returns as a time-varying transition probability Markovian process. The findings reveal some fascinating new information, such as the fact that global policy uncertainty has a strong negative impact on the bulk of ASEAN stock returns during periods of high volatility. Another finding shows that, contrary to assumptions, geopolitical concerns had no effect across all samples. We also discovered that, in both the low and high volatility regimes, oil price changes have a considerable impact on all ASEAN stock markets.

Structural breaks, macroeconomic fundamentals and cross hedge ratio

This paper proposes a new specification to estimate and evaluate the optimal hedge ratio. Due to the concern of structural breaks, we consider a time-varying transition probability regime switching model, which transition probability is driven by lower frequency macroeconomic fundamental variable, namely global policy uncertainty index. Based on the measure of variance reduction and expected utility gain, our model outperforms the specifications with fixed hedge ratio and OLS strategy with regime switching structural. Hence, it pays off to consider structural breaks and macroeconomic fundamental information. The excellent performance of the RS-TVTP-MIDAS model hinges on the ability to adjust strategies flexibly according to financial events.

The role and importance of global policy uncertainty in the development of new global financial architecture

The role and importance of global policy uncertainty in the development of new global financial architecture

Sustainability of Global Economic Policy and Stock Market Returns in Indonesia

Interdependence in trade and financial globalization has increased the vulnerability of developed and developing countries to external shocks alike, whereas emerging markets are more vulnerable to the shocks originating from the world’s leading economies. This paper investigates the impact of the uncertainty from the global economic policy on the return of the Indonesian stock market by using the time-varying correlation based on the rolling window method and time-varying built dynamic conditional correlation method. Both the rolling window and condition correlation estimates indicate that the correlation between global policy uncertainty and Indonesian stock returns is time-varying. The results of the autoregressive distributed lag-based regression indicate that inflation, global crude oil prices, gross domestic product, and world crude oil production have significant impacts on the dynamic conditional correlation. The average negative estimate of time-varying correlation suggests that investors when faced with liquidity constraints in one country may sell off their assets in another country to raise funds in order to meet their future financial needs. This also indicates that the rise in the uncertainty of economic policy in developed markets has a negative impact on the shocks faced by the Indonesian stock market. Based on our empirical findings, it is recommended that Indonesian policymakers should place more focus on the sustainability of the economic growth, pay close attention to volatile crude oil prices, world crude oil production, and inflation so as to avoid dynamic interaction between the uncertainty of economic policy in the developed markets and the return of the Indonesian stock market.

Global policy uncertainty and cross-border acquisitions

Policy uncertainty has been documented to have a significant impact on corporate investment decisions. This paper investigates the effect of policy uncertainty on cross-border acquisitions. We find a significant monotonic relationship between the size of the acquired equity stake in a target firm and the level of policy uncertainty in the target’s country of origin. More specifically, the acquirer is less inclined to purchase a sizeable ownership stake in the target firm, if the target is domiciled in unstable macroeconomic environment. Moreover, we find that acquirers are less willing to pay in cash if the target faces high policy uncertainty. The above results do not seem to depend on the quality of the country’s institutional environment and are robust to alternative econometric specifications. Our study discusses policy implications and should be of interest to academics as well as finance practitioners.

Economic Integration and Exchange Market Pressure in a Policy Uncertain World

This study examines the influence of economic integration, both real and financial, on exchange market pressure (EMP), along with considering external monetary and economic policy uncertainties. Our analysis is based on a group of Asian emerging markets over the period 2000-2018, which covers the global financial crisis and taper tantrum episodes, which have heightened monetary and economic policy uncertainty. By bringing improvements in modeling, and EMP measurement, a time series analysis shows an overall buffering role of real and financial integration on EMP, albeit with a country-level heterogeneity. Similarly, there is a country-level heterogeneity in the foreign exchange market response to monetary and economic policy uncertainties with surging effects in most cases. A panel analysis supports also these results. This research highlights that the current trend of deglobalization may hamper the stabilizing benefit of economic integration given the global policy uncertainty in the foreign exchange market.

Does economic policy uncertainty matter for insurance development? Evidence from 16 OECD countries

We examine the influence of economic policy uncertainty (EPU) on the liveliness of local insurance markets across 16 OECD countries during the 1998–2017 period. Our static panel data estimations suggest that global policy uncertainty is negatively associated with the life insurance development of a country, as measured by national life insurance penetration (gross insurance premium per GDP in %). Meanwhile, such uncertainty does not significantly affect non-life insurance development in our sample. Furthermore, the analysis shows that the impacts of global EPU on life insurance markets are particularly stronger in periods of increasing EPU.

Uncovering the global network of economic policy uncertainty

This study uncovers the static and dynamic network of economic policy uncertainty (EPU) across 17 developed and emerging economies. We build a centrality network using the minimal spanning tree (MST) as well as a dependency network using partial correlations. Results from the MST show that EPU exhibits some degree of geographical connections with EPUs in seven countries in the sample directly linked to the US EPU. Evidence from dynamic time-varying MST reveals that the nature and dominance of the EPU network have changed significantly over time. Further, the US and German EPUs dominate a close-knit global policy uncertainty network with the highest net (To and From) transmitter of information flow in the dependency network. Greece, Russia, and Brazil are the top three net receivers of information in the global network of EPU. The policy implication of these results relates to the renewed and ongoing international debate on policy coordination.

Impacts of Global-Economic-Policy Uncertainty on Emerging Stock Market: Evidence from Linear and Non-Linear Models

Global economic policy uncertainty (GEPU) is one of important phenomena in the global economy; it can impact on the overall economic performance and stock market per-formance, regardless of the status of the world economy. Thus, this paper empirically investigates the impact of global economic policy uncertainty on the Malaysian stock market over the period from 10:2003 to 2017:03. Using the GARCH model, the study demonstrates that global policy uncertainty affects the Malaysian stock market negatively. Similarly, the SVAR model also shows results consistent with the GARCH estimation. Nevertheless, the Markov switching estimation uncovers that global policy uncertainty has negative impacts on stock market performance in both low and high volatile market states. The impact is, however, greater during the high volatile state. Hence, the relationship between global economic policy uncertainty and stock market returns tends to be asymmetric. The overall empirical results infer that global economic policy uncertainty has some implications for asset pricing.

Does Policy Uncertainty Matter for International Equity Markets?

We test whether policy uncertainty affects international equity returns. We construct two measures of global policy uncertainty based on the ratings from international country risk guide. They capture the potential policy shock from government changes and the bureaucratic ability to reduce policy shocks. Both factors significantly affect equity returns in 49 countries from 1995 to 2006 and the bureaucratic factor carries an annual risk premium of 8 percent. The economic and institutional conditions within a country affect the return relation with the policy uncertainty. Overall, our study reveals the significance and distinct characterization of policy uncertainty in international equity markets.