Economic Policy Uncertainty Index Research Articles

U.K. economic policy uncertainty and innovation activities: A firm-level analysis

Our study investigates the effects of economic policy uncertainty (EPU) on firm-level innovation activities. Utilizing the news-based government EPU index of Baker et al. (2016) and a panel sample of 213 UK largest non-financial firms over the period 1999-2018, we find robust evidence that the government EPU has caused a substantial reduction in UK firms’ investment in innovation activities. Moreover, our results further show that such a lower level of corporate investment leads to a decline in their shareholder value, which forms a triangle linkage among EPU, investment and market value.

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.

The Effect of Economic Policy Uncertainty on Green Technology Innovation: Evidence from China’s Enterprises

In some cases, enterprise fears uncertainty more than the policy itself, and this fear can impede innovation. However, this study finds that uncertainty is the source of enterprise’s innovation. We took Chinese A-share listed companies from 2010 to 2018 as the research sample and studied the impact of economic policy uncertainty (EPU) on green technology innovation (GTI). Based on China’s EPU index and green patent-application data of Chinese-listed enterprises, this study adopted a panel fixed regression model and found that EPU has a slightly promoting effect on GTI of Chinese-listed enterprises. This effect is also affected by enterprise ownership and industry characteristics. Among them, EPU has a stronger promoting effect on GTI activities of state-owned enterprises and high-tech enterprises than common enterprises. In particular, if EPU increases, the GTI of high-polluting enterprises is not as great as the incentive effect of ordinary enterprises. The reasons may be that state-owned enterprises have more implicit capital guarantees, high-tech enterprises have higher innovation motivation, and high-polluting enterprises have stronger dependence on traditional production equipment. These results can provide a reference for the debate on “uncertainty.” The conclusions of this paper contain unique policy implications.

The association of COVID-19 nexus on China's economy: A financial crisis or a health crisis?

This paper analyses the interaction between the novel coronavirus pandemic (COVID-19), unemployment rate, stock market, consumer confidence index (CCI), and economic policy uncertainty (EPU) index in China within a time-frequency framework. We compare the changes in economic indicators during the global financial crisis (GFC) and study the different impacts of the two events on China’s economy. An unprecedented impact of COVID-19 shocks on the unemployment rate, CCI, EPU index, and stock market volatility over the low frequency bands is uncovered by applying the coherence wavelet method to China monthly data. The COVID-19 effect on the stock market volatility and the EPU index is substantially higher than on the unemployment rate and the CCI. On the contrary, the GFC’s impact on the unemployment rate is much greater than that on the EPU index and CCI. Additionally, the impact of the GFC on the economy is more cyclical in the long-term, while the COVID-19 pandemic is a short-term shock with a relatively short oscillation cycle. This study concludes that the economic impact of COVID-19 will not spread into a financial crisis for China and believe that the COVID-19 pandemic is more of a health event than an economic crisis for Chinese economy.

Economic policy uncertainty and price pass-through effect of exchange rate in China

Using the Chinese economic policy uncertainty (EPU) index, this paper investigates the spillover effect on the price pass-through effect of the RMB exchange rate and uncertainty, using the time-varying parameter vector autoregressive (TVP-VAR) model. We find that EPU has a significant effect on the price pass-through effect of the RMB exchange rate, which indicates that an increase in uncertainty will significantly enhance the price pass-through effect of the exchange rate. In addition, EPU itself can have a significant spillover effect on the exchange rate. Finally, the price pass-through effect of the RMB exchange rate is incomplete, and its impact on the price level gradually decreases along the circulation chain. The Chinese government should pay close attention to the impact of economic policy uncertainty on the price pass-through effect of the RMB exchange rate and the exchange rate and further strengthen the risk prevention and early warning mechanism to minimize the impact of uncertainty on China's macroeconomy.

International portfolio investment: does the uncertainty matter?

PurposeThis study investigates the effect of global and domestic uncertainty on the dynamics of portfolio investment in 21 economies (mostly advanced and larger emerging economies) from 2001–2016.Design/methodology/approachSpecifically, the evolution of the net portfolio equity investment inflows (FPI net inflows) and the evolution of net portfolio investment (FPI net) are investigated in a context in which the degree and the volatility of domestic economic policy uncertainty (EPU) and world uncertainty index (WUI) varied. The authors provide an empirical analysis through the sequential (two-stage) estimation of linear panel data models for unbalanced panel data.FindingsAn increase in the degree and volatility of domestic EPU has a significant negative influence on FPI net inflows, while an increase in WUI has a significant positive one. Notably, a simultaneous increase in the domestic EPU and WUI enhances the net inflows of FPI, whereas a simultaneous increase in the volatility of these indicators reduces the net inflows of FPI. An increase in the degree and volatility of both domestic EPU and WUI have a significant positive effect on the net portfolio investment, implying that a significant net portfolio investment is going out of the country.Research limitations/implicationsThe results of this study encourage international investors to consider uncertainty indicators (and, more specifically, their variations) in their portfolio strategy to optimize their position on the international markets. The findings of this study invite policy-makers from large countries to reduce the perceived domestic uncertainty since this parameter can influence international investors' sensitivity and willingness to diversify their position out of the country.Originality/valueThe authors' approach focuses on the variations of uncertainty (existing literature mainly works with the indicators). While the results confirm the role played by large markets in international portfolio investment management, it nuances the changes in the portfolio management behaviors toward other markets when facing a changing uncertainty.

The stress contagion among financial markets and its determinants

ABSTRACT The purpose of this paper is to study the spillover effects of financial stress among five important financial markets (bond, stock, foreign exchange, interbank, and real estate markets) in China, and explore the important determinants of financial stress spillover level among the markets and the impact of the Chinese stress spillover situation on the European markets. Our findings are as follows: First, there is a significant stress spillover effect among the five markets, and the total financial stress spillover index (TSSI) is very high during the global financial crisis. Generally, the stock and real estate markets are the major transmitters of stress spillover, and the interbank and bond markets are the major receivers. Second, the most macro factors have significant impacts on the financial stress spillover level among the markets, especially CPI index, the Chinese economic policy uncertainty index and VIX index. And the severity of the COVID-19 epidemic in China and the world has a significant impact on the TSSI, especially from March 2020 to August 2020. Finally, the TSSI can significantly increase the volatility of French stock market, Italian stock market and German government bond market, especially during the Sino-US trade war and the COVID-19 epidemic.

Interplay multifractal dynamics among metal commodities and US-EPU

This research employs the Multifractal Detrended Fluctuations Analysis (MF-DFA) and the Multifractal Detrended Cross-Correlation Analysis (MF-DCCA) to study the components of the observed multifractality considering eight metals commodities time series (Gold, Silver, Platinum, Palladium, Copper, Lead, Nickle and tin) and economic policy uncertainty (US-EPU) index time series. For both multifractal methods, we analyze the generalized Hurst exponent h(q) and the Rényi exponent τ(q), and evaluate their statistical properties, which allow us to examine separately the small-scale contributing (primarily via the negative moments q) and the large scale (via the positive moments q). Also, we calculate the multifractal spectrum f(α) and perform a fourth-degree polynomial regression fit to evaluate the complexity parameters that describe the degree of multifractality, considering the volatility time series and the volatility time series pairs. We find that these volatility time-series (α0>0.5) and these volatility time series pairs (αxy(0)>0.5) are characterized by overall persistent behavior. We discover that Gold seems more related to the other commodities than (US-EPU) index, which is relevant for the different market agents, mainly investors, which could retrieve important information from these results, for example, for diversification purposes.

Word embeddings for topic modeling: An application to the estimation of the economic policy uncertainty index

The quantification of economic uncertainty is key to the prediction of macroeconomic variables, such as gross domestic product (GDP), and is particularly crucial in regard to real-time or short-time prediction methodologies, such as nowcasting, where a large amount of time series data is required. Most of the data comes from official agency statistics and non-public institutions, but these sources are susceptible to lack of information due to major disruptive events, such as the COVID-19 pandemic. Because of this, it is very common nowadays to use non-traditional data from different sources. The economic policy uncertainty (EPU) index is the indicator most frequently used to quantify uncertainty and is based on topic modeling of newspapers. In this paper, we propose a methodology to estimate the EPU index that incorporates a fast and efficient method for topic modeling of digital news based on semantic clustering with word embeddings, allowing us to update the index in real time, which is something that other studies have failed to manage. We show that our proposal enables us to update the index and significantly reduce the time required for new document assignation into topics.

The Impact of Economic Policy Uncertainty on Industrial Output: The Regulatory Role of Technological Progress

Since the 2008 financial crisis, EPU has become an important issue for the stable and healthy development of the economy and society. The existing research has not analyzed the nonlinear impact of economic policy uncertainty (EPU) on output at the industrial level, and it has also ignored the regulatory role of technological progress in the impact of EPU on economic growth. Based on panel data of China’s industry from 2005 to 2017, this paper makes an empirical analysis on the nonlinear impact of EPU on industry output. The results show that: (1) Different from the existing research, this paper finds that EPU has a significant inverted “U”-type nonlinear effect on industrial output, and when the EPU index is close to 221, this is best for output growth. This paper firstly finds that technological progress has a positive regulatory effect in the impact of EPU on industrial output. Technological progress can promote industrial output when EPU is low, and it can reduce the adverse impact of economic policy fluctuations when the EPU index is high. (2) The regulatory effect of technological progress only exists in the industries dominated by state-owned enterprises, and the impact of EPU on the output of non-state-owned enterprises’ leading industries is greater than that of state-owned enterprises. (3) The impact of EPU on the output of cyclical industries shows a significant inverted “U” shape, but there is no regulatory effect of technological progress. Its impact on the output of noncyclical industries is not significant, but it will work together with technological progress. (4) The influence of EPU on the output of the tertiary industry is characterized by an inverted “U” shape, in which technological progress can play a positive regulatory role. However, its impact on the output of primary and secondary industries is not significant.

Macroeconomic attention, economic policy uncertainty, and stock volatility predictability

This study adopts the newly constructed macroeconomic attention indices (MAI) and category-specific economic policy uncertainty (EPU) indices to predict stock volatility. Principal component analysis (PCA), scaled PCA (sPCA), and partial least squares (PLS) are used to extract the principal components from indicators. The results show that the combination of MAI and EPU indices can obtain additional information for predicting stock market volatility. In addition, the comprehensive index containing all indicator information (FtAll) has the strongest short-term forecasting ability, whereas the MAI show the most substantial forecasting ability in long-term forecasting.

Do gold, oil, equities, and currencies hedge economic policy uncertainty and geopolitical risks during covid crisis?

Recent literature extensively studies the safe-haven properties of different asset classes in crisis periods. The magnitude of the economic policy uncertainty index (EPU) and the geopolitical risk (GPR) increases significantly during extreme crisis periods such as covid crisis, but the earlier literature ignores how both risk measures impact on different asset classes during severe economic downturns. In this paper, we contribute by examining the hedging and safe-haven properties of gold, oil, equities, and foreign exchange rates against the United States (US) EPU and GPR by utilizing OLS regression, quantile regression and the quantile connectedness approach for pre-covid (October 1, 2013–March 10, 2020) and post-covid data (March 11, 2020–August 27, 2021). OLS results suggest that only the stock market has positive risk premium for both uncertainty measures. With quantile regression analysis for the pre-covid period, we find that asset returns provide no hedge (hedge) across bearish (bullish) market conditions. Importantly, safe-haven properties suggest that gold is a safe-haven asset at the extreme stress condition (at higher level of USEPU shocks). Other assets also exhibit safe-haven characteristics during extreme uncertain periods with heterogeneity in safe-haven effectiveness across bearish to bullish markets. With the post-covid data, we show that S&P500 stocks and EURO hedge EPU and GPR in bullish market condition, while Oil, S&P500, Great Britain Pound, EURO, Japanese Yen display safe-haven properties at the 99% quantile of USEPU. Specifically, gold lost its safe-haven features during covid. Interestingly, results from quantile connectedness suggest that selected asset returns have the potential to diversify against uncertainty measures considering low volatility transmissions between them across the lower and higher quantiles. Our findings are important for investors and asset managers who aim to hedge EPU and GPR during the stress period.

Uncertainty Economic Policy, Corporate Social Responsibility and Share Volatility During the Covid-19 Pandemic

This article aims to explain the effect of the Index of Economic Policy Uncertainty (EPU) and Corporate Social Responsibility (CSR) on stock volatility, using control variables: Debt to Equity Ratio, Debt To Asset Ratio, and Earnings per share. The expected findings are a positive relationship between EPU and CSR on Stock Volatility, also profitable ratios and leverage ratios that mediate a positive relationship of EPU and stock volatility, using panel data regression analysis. This study explains whether the increase or decrease in sales and profits of cigarette and liquor products, before and after the pandemic, has a correlation with consumer spending on cigarettes and liquor, in the midst of the Covid-19 pandemic. Researchers hope that this research can provide investors and practitioners with an understanding to better understand individual investor interest and consumer behavior towards cigarette and liquor companies in the midst of the Covid 19 pandemic. Keywords: economic policy uncertainty; corporate social responsibility; stock volatility; covid 19; cigarette and liquor companies

Time-frequency connectedness and cross-quantile dependence between crude oil, Chinese commodity market, stock market and investor sentiment

This study mainly analyzes the time-frequency correlation between crude oil, Chinese commodity market, stock market and investor sentiment index, and the cross-quantile dependence of investor sentiment index on China commodity futures and stock market. The data are decomposed by wavelet analysis method, combined with time-frequency volatility spillover method, to observe the spillover changes of Chinese commodity market, stock market, crude oil prices, economic policy uncertainty and investor sentiment index in the vision of short-term, medium-term and long-term investment. Furthermore, we employ the cross-quantilogram framework to investigate the cross-quantile dependence between the investor sentiment index and Chinese commodity futures or stock market. The empirical results are as follow: Firstly, there is a large degree of spillover among various commodity futures in China. WTI transmits vast volatility to Chinese investor sentiment index. Secondly, the total system spillover increases significantly during the outbreak of major economic crisis events and health and safety events. Thirdly, under normal and extreme market conditions, the investor sentiment index has an obvious positive spillover on agricultural futures. On the other hand, the stock index has an obvious positive correlation with the investor sentiment index, and lasts for a long time.

Benefit synergy or “fishing in troubled waters”? Economic policy uncertainty and executive perquisite consumption

PurposeEconomic policy uncertainty (EPU) has huge impact and harm on real economy, so the economic logic and other economic effects behind this must be further studied. By constructing the “China Economic Policy Uncertainty Index” to capture the degree of EPU faced by Chinese companies, the authors empirically test whether and how EPU affects the level of executives' perquisite consumption.Design/methodology/approachThis study investigates the relationship between EPU and executive perquisite consumption based on a sample of 3,185 publicly listed firms in China. To examine the relationship between EPU and executives' perquisite consumption, a mixed least squares method was used for regression. To alleviate the problem of missing variables that do not change over time and control the influence of unobservable individual heterogeneity at the firm level, the firm fixed effects model is used for regression.FindingsThe study finds that EPU is positively associated with executive perquisite consumption. This positive association is stronger for firms with smaller size, lower management shareholding and higher levels of separation of ownership and control. Effective external governance (i.e., analyst coverage, media coverage, auditor and market competition) can mitigate the relationship between EPU and executive perquisite consumption. Further analysis reveals that EPU increases executive perquisite consumption by holding more cash and decreasing firm risk taking. EPU hurts market value of firms by boosting executive perquisite consumption and tunneling.Practical implicationsIn an environment with high EPU, the board of directors should reduce managers' compensation performance sensitivity to ease the agency conflict caused by uncertainty. Firms should improve their governance mechanisms and standard and pay attention to their environmental changes. Policymakers should pay attention to maintaining the continuity and predictability of policies, stabilizing the economic policy expectations of market entities and avoiding frequent changes in policies that can harm economic and firm value. The regulatory authorities should actively guide listed companies to increase active information disclosure during periods of high policy uncertainty.Originality/valueThis study contributes to the research on corporate governance by showing how EPU influences executives' behaviors. The authors advance relative studies by showing that this uncertainty embedded in a firm's external environments influences executive perquisite consumption. This study also contributes to the literature on how internal and external governances influence corporate behavior during uncertainty. These findings extend this line of research by suggesting that effective external governance is an attribute that can alleviate the effect of uncertainty on managers' opportunistic behaviors.

Does Uncertainty Forecast Crude Oil Volatility before and during the COVID-19 Outbreak? Fresh Evidence Using Machine Learning Models

This paper uses two competing machine learning models, namely the Support Vector Regression (SVR) and the eXtreme Gradient Boosting (XGBoost) against the Autoregressive Integrated Moving Average ARIMAX (p,d,q) model to identify their predictive performance of the crude oil volatility index before and during COVID-19. In terms of accuracy, forecasting results reveal that the SVR model dominates the XGBoost and ARIMAX models in predicting the crude oil volatility index before COVID-19. However, the XGBoost model provides more accurate predictions of the crude oil volatility index than the SVR and ARIMAX models during the pandemic. The inverse cumulative distribution of residuals suggests that both ML models produce good results in terms of convergence. Findings also indicate that there is a fast convergence to the optimal solution when using the XGBoost model. When analyzing the feature importance, the Shapley Additive Explanation Method reveals that the SVR performs significantly better than the XGBoost in terms of feature importance. During the pandemic, the predictive power of the CBOE Volatility Index and Economic Policy Uncertainty index for forecasting the crude oil volatility index is improved compared to the pre-COVID-19 period. These findings imply that investor fear-induced uncertainty in the financial market and economic policy uncertainty are the most significant features and hence represent substantial sources of uncertainty in the oil market.

Assessing the Impacts of Economic Policy Uncertainty of the US on the Exchange Rates and Stock Returns of Korea, Mexico, Poland and Russia

ABSTRACT This study examines the effects of the economic policy uncertainty (EPU) index of the US on the exchange rates and stock returns of Korea, Mexico, Poland, and Russia. A time-varying causality test showed that the impacts of EPU of the US on the exchange and stock market of emerging countries could be affected by regime changes. A quantile regression model suggested that the effect of the increase/decrease in the EPU of the US may affect financial variables, while it was indicated that effects of the EPU of the US on the exchange rates and stock returns are asymmetrical.

Global economic policy uncertainty aligned: An informative predictor for crude oil market volatility

This paper constructs an aligned global economic policy uncertainty (GEPU) index based on a modified machine learning approach. We find that the aligned GEPU index is an informative predictor for forecasting crude oil market volatility both in- and out-of-sample. Compared to general GEPU indices without supervised learning, well-recognized economic variables, and other popular uncertainty indicators, the aligned GEPU index is rather powerful and can provide preponderant or complementary information. The trading strategy based on the aligned GEPU index can also generate sizable economic gains. The statistical source of the aligned GEPU index’s predictive power is that it can learn both the magnitude and sign of national EPU variables’ predictive ability and thus yields reasonable and informative loadings. On the other hand, the economic driving force probably stems from the ability for forecasting the shocks of oil-related fundamentals.

THE RELATIONSHIP OF GLOBAL ECONOMIC POLICY UNCERTAINTY AND CRUDE OIL PRICES: APPLICATION OF CAUSALITY IN FREQUENCY

Purpose- In this study, the effect of global economic policy uncertainty on crude oil prices is investigated. Methodology- In the study, which considers the Global Economic Policy Uncertainty (GEPU) Index as an indicator of global economic policy uncertainty and the American WTI crude oil spot and forward prices for crude oil, the data set consists of monthly data for the period January 1997-April 2022. These data were analyzed by Breitung and Candelon's (2006) frequency causality test. Findings- According to the results of Breitung and Candelon's (2006) frequency causality test, only long-term causality relationship was found from GEPU to American WTI crude oil spot and futures prices. In addition, it is seen that there is no causality relationship from American WTI crude oil spot prices to GEPU in short-term, mid-term and long-term while there is only long-term causality from American WTI crude oil future prices to GEPU. Conclusion- It is thought that economic policy uncertainty tends to affect crude oil prices due to differences in demand. In line with these results, it becomes important for investors to consider the GEPU Index and the economic conditions affecting this index within the scope of their hedging strategies. Keywords: Economic policy uncertainty, crude oil, spot market, futures market, causality in frequency JEL Codes: G32, G15, C32

Do Oil Price Shocks and COVID-19 Lead to Policy Uncertainty?

This study examines the asymmetric effects of the structural oil price shocks and COVID-19 pandemic on four uncertainty indexes. The author used the SVAR approach for the period 31-Dec-2019 to 28-Jun-2020. The results indicate that the effects are asymmetric of oil price shocks. The author also finds that COVID-19 shocks lead to positive responses to the economic policy uncertainty index. In addition, oil prices (their shocks) have a negative impact on the four indicators of uncertainty. Consequently, governments should actively take effective measures to prevent crude oil prices from shocking and maintain stable economic policies.