US Economic Policy Uncertainty Research Articles

Volatility dynamics in energy and agriculture markets: An analysis of domestic and global uncertainty factors

Purpose This study aims to explore the intricate relationship between uncertainty indicators and volatility of commodity futures, with a specific focus on agriculture and energy sectors. Design/methodology/approach The authors analyse the volatility of Indian agriculture and energy futures using the GARCH-MIDAS model, taking into account different types of uncertainty factors. The evaluation of out-sample predictive capability involves the application of out-sample R-squared test and computation of various loss functions. Findings The research outcomes underscore the significant impact of diverse uncertainty factors such as domestic economic policy uncertainty (EPU), global EPU (GEPU), US EPU and geopolitical risk (GPR) on long-run volatility of Indian energy and agriculture (agri) futures. Additionally, the study demonstrates that GPR exhibits superior predictive capability for crude oil futures volatility, while domestic EPU stands out as an effective predictor for agri futures, particularly castor seed and guar gum. Practical implications The study offers practical implications for market participants and policymakers to adopt a comprehensive perspective, incorporating diverse uncertainty factors, for informed decision-making and effective risk management in commodity markets. Originality/value The research makes an inaugural attempt to examine the impact of domestic and global uncertainty indicators on modelling and predicting volatility in energy and agri futures. The distinctive feature of considering an emerging market also adds a novel dimension to the research landscape.

Economic Policy Uncertainty and Firms’ Non-GAAP Reporting

Using the US economic policy uncertainty (EPU) index developed by Baker, S. R., Bloom, N., & Davis, S. J. [2016. Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024], we examine the impact of policy uncertainty on firms’ non-GAAP reporting practices. We show that EPU increases both the likelihood and quality of non-GAAP earnings disclosures. These effects are more pronounced for firms with higher index ownership and for those with less informative GAAP earnings. Furthermore, we show that non-GAAP disclosures provide tangible economic benefit during periods of increasing EPU, including compensating for the reduced informativeness of GAAP earnings and reducing information asymmetry. Overall, our evidence suggests that non-GAAP reporting is a means by which managers communicate value-relevant information about their firms’ performance to investors during periods of high EPU.

International economic policy uncertainty and analysts' earnings forecasts

We investigate the extent to which international economic policy uncertainty (EPU) impacts analysts' earnings forecasts. Using a sample of Australian firms, we demonstrate that EPU is positively associated with the size of forecast errors and the extent of forecast dispersion. Consistent with Australia being a relatively small but open economy, we show that this EPU effect extends beyond domestic EPU to include global and country-specific EPU, most notably Chinese and US EPU. The effect of international EPU is stronger for short-term forecasts, and for firms with higher growth prospects and profitability. However, the effect of Australian EPU is more pronounced for longer horizon forecasts and for firms in the resources and mining industries, and those with lower growth and profitability. Our results are consistent with heightened international EPU negatively impacting firms' information environment, with increased variation in market participants' beliefs.

What causes US equity market sector volatilities during the coronavirus pandemic?

ABSTRACT This paper seeks to identify key variables contributing to sectoral stock market volatilities in the US under the enduring pressure of the COVID-19 pandemic, using a broad array of candidate factors. We adopt a Beta-Skew-t-EGARCH model to capture the time-varying dynamics of the individual sectoral return volatilities. The empirical analysis is performed via an elastic-net regularized regression model. We find that trading volume, volatility of broad US dollar exchange rates, coronavirus infection rates, VIX, Google search trends, US economic policy uncertainty, and the initiation of vaccination programmes are the most common determinants of sectoral volatility.

How does Shanghai crude oil futures affect top global oil companies: The role of multi-uncertainties

The international influence of Shanghai crude oil futures (INE) has been increasing year by year. This study adopts the connectedness network method to construct a risk spillover network between INE and the top 20 global oil companies and measures the static characteristics and dynamic trends of return and risk spillovers. wMoreover, the core factors affecting the systemic risk are identified from the dimensions of crude oil implied volatility, geopolitical risk, US economic policy uncertainty, and climate concern. The results reveal that the overall connectedness between INE returns and global oil company stock price returns is high, with oil companies located in the Americas and at the upstream end of the chain experiencing greater spillovers in the system. Furthermore, INE is a net recipient of risk spillovers in the system, being subject to spillovers from most oil companies. In a dynamic scenario, the total system spillover index is susceptible to unexpected events, and there is asymmetry in the system risk spillover between INE and oil company returns. Meanwhile, crude oil implied volatility and geopolitical risk are the main influences on the systematic risk of INE and oil company returns.

Asian stock market volatility and economic policy uncertainty: The role of world and regional leaders

This paper investigates the relative influence of the United States, China, Japan and the European Union on Asian stock markets from the perspective of economic policy uncertainty (EPU). The empirical setting assumes that stock markets evolve through high- and low-volatility regimes with a probability driven by EPU in these leader countries. The main result of the paper indicates that Chinese EPU surpasses Japanese and US EPU as the main driver of Asian stock market volatility, except in the South Korean and Hong Kong stock markets. Moreover, Chinese policy-specific uncertainty indices, such as monetary, fiscal, trade and exchange rate policies play a significant role but in the most developed financial markets only. These result provides further evidence that China’s economic and financial ties with its near neighbors are deepening, which has important implications for the regional institutions tasked with promoting and monitoring regional financial stability.

Economic Uncertainty and Bitcoin Volatility: Evidence During COVID-19

This research investigates the predictability of economic uncertainty indexes on the volatility of Bitcoin (BTC) during COVID-19. The economic uncertainty indexes include US economic policy uncertainty (EPU), Twitter economic uncertainty (TEU), Twitter market uncertainty (TMU), geopolitical risk index (GPR), and trade policy uncertainty (TPU) index. The empirical findings show that the Twitter market uncertainty (TMU) and geopolitical risk (GPR) uncertainty index are valuable predictors of BTC volatility. Moreover, the combination forecasts information for all economic uncertainty indexes is useful for BTC volatility forecasting. Also, we find evidence during high and low volatility and the Russia–Ukraine war. Our results show that Twitter market uncertainty and geopolitical risk uncertainty index are effective predictors of Bitcoin volatility during high volatility periods. During the Russia–Ukraine war, economic policy uncertainty (EPU), the Twitter market uncertainty index, and combination forecast information for all uncertainty indexes are effective for Bitcoin volatility prediction. Our findings are robust with the alternative method MCS test.

Market return spillover from the US to the Asia-Pacific Countries: The Role of Geopolitical Risk and the Information & Communication Technologies.

This study examines the market return spillovers from the US market to 10 Asia-Pacific stock markets, accounting for approximately 91 per cent of the region's GDP from 1991 to 2022. Our findings indicate an increased return spillover from the US stock market to the Asia-Pacific stock market over time, particularly after major global events such as the 1997 Asian and the 2008 global financial crises, the 2015 China stock market crash, and the COVID-19 pandemic. The 2008 global financial crisis had the most substantial impact on these events. In addition, the findings also indicate that US economic policy uncertainty and US geopolitical risk significantly affect spillovers from the US to the Asia-Pacific markets. In contrast, the geopolitical risk of Asia-Pacific countries reduces these spillovers. The study also highlights the significant impact of information and communication technologies (ICT) on these spillovers. Given the increasing integration of global financial markets, the findings of this research are expected to provide valuable policy implications for investors and policymakers.

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.

Connectedness and economic policy uncertainty spillovers to the ASEAN stock markets

Uncertainty regarding Chinese and American economic policies impacts major investable asset classes in politically contestable geographic regions such as Southeast Asia. Our objective is to examine the dependence structure of Chinese and American Economic Policy Uncertainty (EPU) and returns on six Association of Southeast Asian Nations (ASEAN) stock indices and to assess the impact of a significant statecraft consideration, the One Belt One Road (OBOR) Initiative, and an exogenous shock, the COVID-19 crisis, on the connectedness between EPU and ASEAN stock returns. We do so by employing novel connectedness and copula approaches. We find that American and Chinese EPU influence ASEAN equity indices differently across countries, with the connectedness of US EPU and ASEAN stock markets exceeding that of Chinese EPU post-2002. Further, we find that the introduction of the OBOR Initiative by China in 2013 coincided with a slight change in the dependence structure for several individual ASEAN stock indices, and show that the impact of the COVID-19 pandemic on the relationship between American and Chinese EPU and individual ASEAN stock index returns was not homogenous across countries. In doing so, we shed new light on the vulnerability of ASEAN member capital markets to statecraft considerations and exogenous shocks, as well as to economic policy decision-making in China and the United States.

The effects of high uncertainty risk on international stock markets

AbstractWe conduct an international analysis of the cross-sectional risk premiums of uncertainty risk factors in addition to traditional risk factors. We consider international stock markets in five regions separately. We measure uncertainty by the local and US economic policy uncertainty indices. Economic policy uncertainty risk has negative risk premiums. This implies that investors get lower returns for assets with high uncertainty betas. We further analyze a nonlinear relationship between excess returns and uncertainty risk by adding the downside economic policy uncertainty risk factor which captures high levels of uncertainty, similar to downside market risk. The downside uncertainty risk factor has negative risk premiums.

Multiscale interdependence between economic policy uncertainty and industrial production of Central and Eastern European countries

AbstractThis paper shows how the three economic policy uncertainties (EPUs), namely global economic uncertainty, US economic policy uncertainty and German economic policy uncertainty, impact the industrial production of 8 Central and Eastern European countries. The investigation is done in both time and frequency domains, using the wavelet coherence and wavelet correlation approaches. The US EPU has the strongest effect on all industrial productions, while this effect was recorded during the global financial crisis and the corona virus pandemic. The most intense effect was found in the time-horizon between 4 and 8 months. The Czech Republic and Hungary suffer the strongest impact from EPU, probably because these two economies have relatively high ratio of export (import) vis-à-vis GDP. We fail to find very strong and wide areas of coherence in the Slovakian plot, although Slovakia has the highest level of export (import) to GDP. However, the wavelet correlation findings indicate that Slovakia has relatively high negative correlation at third wavelet scale, which is perfectly in compliance with its high export (import) share in GDP.

Enhancing exchange rate volatility prediction accuracy: Assessing the influence of different indices on the USD/CNY exchange rate

In this paper, the GARCH-MIDAS model is used to empirically study the influence of several uncertainties on the volatility of the CNY-USD forex market. The sample and out-of-sample prediction results show that the nine uncertainty indexes significantly impact the volatility of the CNY-USD forex market and can improve the prediction effect of CNY-USD rate volatility. Then using model confidence set and Direction-of-change test out-of-sample test, it is found that Compared with China's Economic policy uncertainty and China's trade policy uncertainty, US Economic Policy Uncertainty and US trade policy uncertainty can improve the prediction accuracy of CNY-USD forex market volatility.

The US State-Level Wood Product-Based Bilateral Trade Balances with Canada Under the Protectionist US Trade Policy, COVID-19, and Economic Policy Uncertainty

ABSTRACT The US-Canada wood product trade is a longstanding dispute due to protectionist high-tariff policies, further exacerbated by COVID-19 restrictions on US production and exports. This study investigates the J-curve effect at the US state level, revealing that only 11 US states support the asymmetric J-curve for wood products, whereas 10 US states support the asymmetric inverse J-curve (shown in Appendix 2 online). Furthermore, high tariffs imposed by the US improved trade balances for only three states, implying that the high-tariff policy did not enhance the US wood-based trade balance with Canada.

Economic Policy Uncertainty and Emerging Stock Market Volatility

This research examines the effect of economic policy uncertainty (EPU) indices on Pakistan's stock market volatility. Particularly, we examine the impact of the economic policy uncertainty index for Pakistan and bilateral global trading partner countries, the US, China, and the UK. We employ the GARCH-MIDAS model and combination forecast approach to evaluate the performance of economic uncertainty indices. The empirical findings show that the US economic policy uncertainty index is a more powerful predictor of Pakistan stock market volatility. In addition, the EPU index for the UK also provides valuable information for equity market volatility prediction. Surprisingly, Pakistan and China EPU indices have no significant predictive information for volatility forecasting during the sample period. Lastly, we find evidence of all uncertainty indices during economic upheaval from the COVID-19 pandemic. We obtained identical results even during the Covid-19. Our findings are robust in various evaluation methods, like MCS tests and other forecasting windows.

Domestic and international effects of economic policy uncertainty on corporate investment and strategic cash holdings: Evidence from Japan

We empirically examine the effects of economic policy uncertainty (EPU) of which measurement methodology Baker, Bloom & Davis (2016) propose on the investment and cash holding behaviors of Japanese firms. We also examine spillover effects of EPU of the United States on them. We find that Japanese firms invest less and accumulate more cash when domestic EPU increases. Impacts of subcategories of domestic EPU differs: the uncertainty of fiscal and exchange rate policies are the key drivers of the negative impacts on corporate investment although the predictive power for investment of economic policy uncertainty of exchange rate holds only in the short run. As for the international spillover, we find that economic policy uncertainty in the United States has negative spillover (contagion) effects on corporate investment in Japan. Our findings suggest that Japanese managers become more cautious in making investment decisions as a response not only to higher domestic EPU but also US EPU.

Asia-Pacific stock market return and volatility in the uncertain world: Evidence from the nonlinear autoregressive distributed lag approach.

This paper examines the effects of three distinct groups of uncertainties on market return and volatility in the Asia-Pacific countries, including (i) the country-specific and US geopolitical risks; (ii) the US economic policy uncertainty; and (iii) the US stock market volatility (using the VIX and SKEW indices). Our sample includes 11 Asia-Pacific countries for the 1985-2022 period. We employ the nonlinear autoregressive distributed lag approach (ARDL) estimation technique to capture the asymmetric effects of uncertainties on market return and volatility, which are documented in the literature. Some findings are documented as follows. First, we find that US uncertainty indices, including US geopolitical risk, US economic policy uncertainty, and US VIX, significantly impact Asia-Pacific stock markets, while the impacts of domestic geopolitical risk and the US skewness index (SKEW) are relatively weak. Second, Asia-Pacific stock markets tend to overreact to uncertainty shocks stemming from US economic policy uncertainty and US geopolitical risk. Third, US economic policy uncertainty has more significant effects than the US geopolitical risk. Finally, our research documents that Asia-Pacific stock markets react heterogeneously to good and bad news from US VIX. Specifically, an increase in US VIX (bad news) has a stronger impact than a decrease in US VIX (good news). Policy implications have emerged based on the findings of this study.

Does Central Bank Transparency Deter the Exchange Rate Volatility? New Evidence from Asian Emerging Markets

Abstract Exchange rate volatility has emerged as a significant challenge for Asian emerging markets since the adoption of the liberalization process. This study examines the influence of central bank transparency on exchange rate volatility using a sample of ten important Asian emerging markets. The study uses a fixed effect regression model covering the Asian financial crisis, global financial crisis, banking crisis, and taper tantrum episodes. Results show that an increase in central bank transparency has a stabilizing effect on exchange rate volatility, and this effect remains even after controlling for various internal and external factors. The uncertainty of US monetary policy increases exchange rate volatility, while US economic policy uncertainty contributes only during the global financial crisis. Interestingly, central bank transparency buffers the effects of the global financial crisis, indicating that it plays a facilitating role in maintaining financial stability. Studies that examine the role of central bank transparency in curbing exchange rate volatility, which is a crucial issue in these markets, are rare in emerging markets’ context. This research offers interesting findings by using a variety of robustness checks.

Can COVID-19 deaths and confirmed cases predict the uncertainty indexes? A multiscale analysis

Purpose This study aims to examine the multiscale predictability power of COVID-19 deaths and confirmed cases on the S&P 500 index (USA), CAC30 index (France), BSE index (India), two strategic commodity futures (West Texas intermediate [WTI] crude oil and Gold) and five main uncertainty indices Equity Market Volatility Ticker (EMV), CBOE Volatility Index (VIX), US Economic Policy Uncertainty (EPU), CBOE Crude Oil Volatility Index (OVX) and CBOE ETF Gold Volatility Index (GVZ). Furthermore, the authors analyze the impact of uncertainty indices and COVID-19 deaths and confirmed cases on the price returns of stocks (S&P500, CAC300 and BSE), crude oil and gold. Design/methodology/approach The authors used the wavelet coherency method and quantile regression approach to achieve the objectives. Findings The results show strong multiscale comovements between the variables under investigation. Lead-lag relationships vary across frequencies. Finally, COVID-19 news is a powerful predictor of the uncertainty indices at intermediate (4–16 days) and low (32–64 days) frequencies for EPU and at low frequency for EMV, VIX, OVX and GVZ indices from January to April 2020. The S&P500, CAC30 and BSE indexes and gold prices comove with COVID-19 news at low frequencies during the sample period. By contrast, COVID-19 news and WTI oil moderately correlated at low frequencies. Finally, the returns on equity and commodity assets are influenced by uncertainty indices and are sensitive to market conditions. Originality/value This study contributes to the literature by exploring the time and frequency dependence between COVID-19 news (confirmed and death cases) on the returns of financial and commodity markets and uncertainty indexes. The findings can assist market participants and policymakers in considering the predictability of future prices and uncertainty over time and across frequencies when setting up regulations that aim to enhance market efficiency.

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.