A comprehensive investigation on the predictive power of economic policy uncertainty from non-U.S. countries for U.S. stock market returns |
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| Institution: | 1. School of Economics and Management, Southwest Jiaotong University, Chengdu, China;2. Service Science and Innovation Key Laboratory of Sichuan Province, China;3. School of Business, Lebanese American University, Lebanon;1. Department of Risk Management and Insurance, Tamkang University, Taiwan, 151, Yingzhuan Rd., Tamsui Dist., New Taipei City 25137, Taiwan;2. Department of Risk Management and Insurance, Research Fellow, Risk and Insurance Research Center, College of Commerce, National Chengchi University, Taiwan, 64, Sec. 2, Zhi-Nan Road, Wen-Shan District, Taipei 11605, Taiwan;1. Business School, Hunan University, Changsha 410082, China;2. School of Business, State University of New York at Oswego, 1326, United States;3. Lianmin Academy of Economic Research, Liaoning University, Shenyang 110036, China;4. School of Economics and Business Administration, Chongqing University, Chongqing 400030, China;1. School of Public Finance and Taxation, Southwestern University of Finance and Economics, 555 Liutai Road, Chengdu 611130, PR China;1. School of Economics and Trade, Hunan University of Technology and Business, Changsha, China;2. School of Economics and Business Administration, Chongqing University, Chongqing, China;3. Business School, Central South University, Changsha, China;1. Department of Accounting and Finance, UWA Business School, The University of Western Australia, 35 Stirling Highway, Crawley, Western Australia 6009, Australia;2. Institute of Social Science Survey, Peking University, 5 Yiheyuan Road, Haidian District, Beijing 100871, China;3. Department of Accounting, School of Business, Renmin University of China, 59 Zhongguancun Street, Haidian District, Beijing 10082, China |
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| Abstract: | This study uses economic policy uncertainty (EPU) indices for ten developed countries, three diffusion models, and five combination methods to forecast excess returns in the U.S. stock market. It shows empirically that, over the period January 1997 to January 2022, non-U.S. EPU indices have better predictive power for U.S. equity market excess returns than the U.S. EPU index itself. This illustrates how economic information from international markets can affect the U.S. stock market. This finding challenges the extensively recognized view that the U.S. is where important market signals are initially transmitted to other markets, suggesting that this belief is incomplete. Our outcomes are robust to a battery of tests covering model selection, model specification, forecast horizons, and the pandemic period, and their economic values are assessed. The findings are essential for the financial field to confront future fierce situations and crises. |
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