Economic policy uncertainty and illiquidity return premium

In this study, we examine the relation between the price of liquidity, or illiquidity return premium, and the economic policy uncertainty (EPU). On average, an illiquid portfolio earns a 0.597% higher monthly return than a liquid portfolio. The results further show that the EPU index has a positive relationship with the illiquidity return premium. This indicates that investors require higher compensation for holding illiquid stocks when there is a higher economic uncertainty. We also show that EPU affects the illiquidity return premium through the market illiquidity channel. The rise of EPU could increase the risk of illiquid stocks and make investors more risk-averse, thereby requiring higher compensation for illiquidity. Finally, it is found that the relationship between EPU and the illiquidity return premium is stronger when market liquidity is impaired and during crises.     

Economic policy uncertainty and cost of debt financing: International evidence

Prior research shows that economic policy uncertainty affects a wide range of corporate financial decisions; however, there is little research on the relationship between economic policy uncertainty and cost of debt financing across countries. In this paper, we argue that economic policy uncertainty affects cost of debt financing through two mechanisms including information asymmetry and default risk. With a sample of 163,243 firm-years across 17 countries from 2003 to 2016, we find that economic policy uncertainty positively affects cost of debt financing and this effect is stronger during the global financial crisis from 2008 to 2009. Moreover, our research findings show that large firms’ debt financing cost is less affected by economic policy uncertainty.     

Economic policy uncertainty effects for forecasting future real economic activity

Recently introduced measures for economic policy uncertainty (EPU), included in the data from 1997 to 2016, have a role in forecasting out-of-sample values for future real economic activity for both the euro area and UK economies. The inclusion of EPU measures, either for the US, the UK or for overall European economies, improves the forecasting ability of models based on standard financial market information, especially for the period before the 2008 global crisis. However, during and after the crisis period, the slope of the yield curve and excess stock market returns improves the out-of-sample forecast performance the most compared to an AR-benchmark model. Hence, the EPU information is important in times of normal business cycles, but might contain similar information components to financial market return variables during turbulent crisis periods in the financial markets and in the real economy.     

The macroeconomic impact of economic uncertainty and financial shocks under low and high financial stress

External financial frictions might increase the severity of economic uncertainty shocks. We analyze the impact of aggregate uncertainty and financial condition shocks using a threshold vector autoregressive (TVAR) model with stochastic volatility during distinct US financial stress regimes. We further examine the international spillover of the US financial shock. Our results show that the peak contraction in euro area industrial production due to uncertainty shocks during a financial crisis is nearly-four times larger than the peak contraction during normal times. The US financial shocks have an influential asymmetric spillover effect on the euro area. Furthermore, the estimates reveal that the European Central Bank (ECB) is more cautious in implementing a monetary policy against uncertainty shocks while adopting hawkish monetary policies against financial shocks. In contrast, the Fed adopts a more hawkish monetary policy during heightened uncertainty, whereas it acts more steadily when financial stress rises in the economy.     

The transmission of US economic policy uncertainty shocks to Asian and global financial markets

This paper proposes a novel approach to investigating the spillover effects of US economic policy uncertainty shocks on the global financial markets. Employing a factor-augmented vector autoregression (FAVAR), we model US economic policy uncertainty jointly with the latent factors extracted from equity prices, exchange rates, and commodity prices. We find that US economic policy uncertainty affects these factors significantly. A country-level analysis shows heterogeneous responses to an increase in US economic policy uncertainty. With regard to equities, US economic policy uncertainty adversely affects equity prices. However, its impact on the Chinese equity market is relatively small. As for foreign exchange markets, while many currencies depreciate in response to an increase in US economic policy uncertainty, the US dollar and the Japanese yen appreciate, reflecting their safe-haven status. The Chinese yuan, whose nominal exchange rate is closely linked to the US dollar, also appreciates in response to uncertainty shocks.     

Economic policy uncertainty and enterprise value: Evidence from Chinese listed enterprises

In this paper, we investigate how economic policy uncertainty (EPU) influences enterprise value based on China’s EPU index and financial data on A-share listed enterprises from 2004 to 2018. Our empirical results show that uncertainty in economic policy has a significant restraining effect on enterprise value in general and that the degree of the impact is closely related to enterprise characteristics, including financial leverage, scale, R&D intensity, the degree of marketization, ownership, and location. More precisely, an increase in financial leverage and scale can mitigate the restraining effect of EPU on enterprise value, while an increase in R&D intensity and marketization degree will exacerbate the restraining effect. In addition, non-state-owned enterprises (non-SOEs) and firms located in first-tier cities are more vulnerable to rising EPU. The evidence indicates that policymakers should pay attention to stability in macroeconomic policy and micro-enterprises should be concerned about the impact of uncertainty in economic policy, plan ahead, and take precautions.     

Economic policy uncertainty and capital structure choice: Evidence from China

This paper studies how economic policy uncertainty affects corporate capital structure for Chinese listed firms from 2003 to 2013. We show that as the degree of economic policy uncertainty increases, firms tend to lower their leverage ratios. However, firms that are from regions with lower degrees of marketization, are state-owned or have prior bank-firm relationships mitigate the negative effect of policy uncertainty. Moreover, we provide consistent evidence that this negative effect is sourced from the deterioration of the external financing environment. We also find that firms adjust their financing structures by using more trade credit when economic policy uncertainty increases. Our results are robust to sample selection, data frequency, model specification and endogeneity.     

Economic policy uncertainty and stock market sector time-varying spillover effect: Evidence from China

This paper investigates the volatility spillover effect among the Chinese economic policy uncertainty index, stock markets, gold and oil by employing the time-varying parameter vector autoregressive (TVP-VAR) model. Three main results are obtained. Firstly, the optional consumption, industry, public utility and financial sectors are systemically important during the sample period. Secondly, among the four policy uncertainties, the uncertainty of fiscal policy and trade policy contributes more to the spillover effect, while the uncertainty of monetary policy and exchange rate policy contributes less to the spillover effect. Thirdly, during COVID-19, oil spillovers from other sources dropped rapidly to a very low point, it also had a significant impact on the net volatility spillover of the stock market. This paper can provide policy implication for decision-makers and reasonable risk aversion methods for investors.     

Economic policy uncertainty,oil price volatility and stock market returns: Evidence from a nonlinear model

This paper investigates the nonlinear relationship between economic policy uncertainty, oil price volatility and stock market returns for 25 countries by applying the panel smooth transition regression model. We find that oil price volatility has a negative effect on stock returns, and this effect increases with economic policy uncertainty. Furthermore, there is pronounced heterogeneity in responses. First, oil-exporting countries whose economies depend more on oil prices respond more strongly to oil price volatility than oil-importing countries. Second, stock returns of developing countries are more susceptible to oil price volatility than that of developed countries. Third, crisis plays a crucial role in the relation between oil price volatility and stock returns.     

Economic policy uncertainty and stock market returns: New evidence

This paper investigates the predictive performance of the Chinese economic policy uncertainty (EPU) index constructed by Davis, Liu, and Sheng (2019) in forecasting the returns of China’s stock market. Using the univariate and bivariate predictive regression model, we confirm that the monthly EPU index can significantly and negatively impact the next month’s stock returns, and has better out-of-sample predictability than the existing EPU index and several macroeconomic variables. By comparing the forecasting effect of the EPU index before and during special events with sharply increased uncertainty, we find that the EPU’s forecasting power decline rapidly when an event of sharply increased uncertainty occurs. Finally, our conclusions are consistent through a batch of robustness tests.     

Sensitivity of US equity returns to economic policy uncertainty and investor sentiments

This paper examines the sensitivity of major US sectoral returns to economic policy uncertainty and investor sentiments. Our analysis is based on weekly frequency and ranges from January 1995 to December 2015 covering a span of 20 years. Considering existing, however limited evidence of non-linear structure exhibited by investor sentiments and economic policy uncertainty and on the basis of our non-linear diagnostics, we use novel technique of non-parametric causality in quantiles approach proposed by Balcilar, Gupta, and Pierdzioch (2016). Our results highlight that economic policy uncertainty and investor sentiments act as driving factors for US sectoral returns. The nature of relationship is reported as asymmetrical for stock returns and symmetrical for variance of returns with an exception of Healthcare sector for economic policy uncertainty and bullish market sentiments. Our study carries implications for portfolio diversification and policy makers for forecasting market efficiency and economic trends.     

Non-linear causal linkages of EPU and gold with major cryptocurrencies during bull and bear markets

This paper sets out to explore whether the innovative Economic Policy Uncertainty (EPU) index and the safe haven asset of gold influence returns of high-capitalization cryptocurrencies in a non-linear manner. Estimations take place both concerning flourishing and stressed periods in the digital currency markets. Econometric outcomes reveal that the returns of almost half of the cryptocurrencies investigated are tightly connected to the EPU index in bull markets while even more currencies are linked with the index during bear markets. Similar findings are revealed as concerns gold as it proves to be more influential during bear markets due to its hedging capacities. There is also evidence that causality in variance is significant in all but the higher quantile concerning both EPU and gold estimations in both bull and bear markets.     

Economic uncertainty,central bank digital currency,and negative interest rate policy

The COVID-19 outbreak has brought unprecedented social attention to economic uncertainty and negative interest rate policy (NIRP). How does uncertainty affect economic activity, and how effective is a NIRP based on central bank digital currency (CBDC)? To answer the two questions, we constructed a dynamic stochastic general equilibrium (DSGE) model that accommodates sticky prices and wages. The results indicated: (i) Economic uncertainty has substantially reduced investment, output, wage, and loans, which increases unemployment risk. In the short term, it has triggered impulsive consumption by households, while consumption has fallen into a slump in the long run. (ii) After suffering an uncertainty shock, the economy entered short-term stagflation and long-term deflation. The short-term stagflation was mainly caused by resident wage adjustment, and the long-term deflation was due to the decline in effective demand caused by unemployment risk. (iii) CBDC could eliminate the zero lower bound (ZLB) constraint, thereby improving the effectiveness of NIRP. Compared with traditional currency, CBDC-based NIRP could more effectively smooth macroeconomic fluctuations and alleviate the negative impact of an uncertainty shock, which is more conducive to restoring market confidence and promoting economic recovery.     

Economic Integration and Regional Business Cycles: Evidence from the Iberian Regions*

This paper provides evidence of the positive impact of economic integration on EU regions’ business cycles convergence by focusing on two neighbouring countries: Spain and Portugal. We show that while a rise in cross‐country business cycle correlation has also been experienced by other European countries, it has been relatively more pronounced for Iberian regions. Econometric evidence suggests that the existence of an administrative border, the economic size of regions and their industrial structures can explain a substantial proportion of regional cycles.     

Monetary policy,financial uncertainty,and secular stagnation

A monetary policy framework describing how to cope with a financial crisis might alleviate a recession; however, it might also result in subsequent secular stagnation. Based on an empirical New Keynesian model with financial uncertainty, this study investigates how monetary policy can avoid sluggish economic recovery in response to financial shocks. The results show that a protracted sluggish response of an output gap to a financial shock is triggered by inflation targeting, without considering interest rate variations. In such a policy, the uncertainty causes additional sluggish behavior after a sharp reduction in the output gap. In contrast, in a speed limit policy, the output gap recovers rapidly, regardless of the central bank’s approach to interest rate variations, and the uncertainty mitigates reductions in the output gap. Finally, the results are robust under several alternative settings.     

Determinants of European stock market integration

We analyse the determinants of stock market integration among EU member states for the period 1999–2007. First, we apply bivariate DCC-MGARCH models to extract dynamic conditional correlations between European stock markets, which are then explained by interest rate spreads, exchange rate risk, market capitalisation, and business cycle synchronisation in a pooled OLS model. By grouping the countries into euro area countries, “old” EU member states outside the euro area, and new EU member states, we also evaluate the impact of euro introduction and the European unification process on stock market integration. We find a significant trend toward more stock market integration, which is enhanced by the size of relative and absolute market capitalisation and hindered by foreign exchange risk between old member states and the euro area. Interest rate spreads and business cycle synchronisation are also significant factors in explaining equity market integration.     

Housing, credit, and real activity cycles: Characteristics and comovement

This paper describes the characteristics and comovement of cycles in house prices, residential investment, credit, interest rates, and real activity in advanced economies during the past 25 years. Stylized facts and regularities are uncovered using a dynamic generalized factor model and spectral techniques. House price cycles are found to lead credit and real activity over the long term, while in the short to medium term the relationship varies across countries. Interest rates tend to lag other cycles at all time horizons. Although global factors are important, the US business cycle, housing cycle and interest rate cycle generally lead the respective cycles in other countries over all time horizons, while the US credit cycle leads mainly over the long term.     

The daily relationship between U.S. asset prices and stock prices of American countries

The daily transmission of U.S. comprehensive stock indices to foreign stock markets has been studied extensively, but the transmission may just be that the foreign stock prices respond to news underlying the change in the U.S. stock indices. Besides the regularly economic announcements, news relevant for the U.S. economy may include qualitative news and non-economic events. Due the daily nature of the news, there is no appropriate reference as to its impact on the U.S. or foreign economy and the only accessible reference probably is the change in the financial asset prices. But the U.S. stock index is general in nature and cannot be used to offer specific information about the U.S. economy. Some U.S. asset prices other than stock indices may reveal more specific information about the U.S. economy. Looking into the daily relationship between these U.S. asset prices and stock indices of four American countries in two periods with drastically different economic conditions, this study finds that the daily relationship between these U.S. asset prices and foreign stock prices is consistent with the prevailing U.S. economic fundamentals. From the relationship we identify some U.S. economic conditions foreign stock prices respond to. These economic conditions include real economic shocks, monetary policies, and business default risks.     

Time-frequency connectedness of crude oil,economic policy uncertainty and Chinese commodity markets: Evidence from rolling window analysis

This article investigates the time–frequency connectedness of economic policy uncertainty (EPU), WTI crude oil and Chinese commodity markets during the period between 2004 and 2020. Rolling window wavelet vector autoregression and connectedness networks are developed to evaluate the time-varying characteristics of the connectedness. The empirical results are as follows: First, the total connectedness between EPU, oil and commodities becomes stronger as the time scale increases. Second, the net connectedness of EPU and WTI in the system is positive, indicating that EPU and WTI are contributors to information and will affect financial markets across time scales. Third, the connectedness remains at a high level during financial crises across all scales, and the contribution of EPU and crude oil to commodities increases significantly. Specifically, compared with other commodity sectors, grains are greatly affected by EPU under the condition that the energy sector is seriously affected by crude oil. Overall, investors and policy makers should consider connectedness in terms of time and frequency when making a decision.     

The risk spillover between China’s economic policy uncertainty and commodity markets: Evidence from frequency spillover and quantile connectedness approaches

Based on the frequency spillover method extended by Baruník and Křehlík (2018), we explore the risk spillover relationship between China’s economic policy uncertainty (CNEPU) and commodity futures in different frequency domains with daily settlement price data of 14 commodity futures in China. The results show that the risk spillover relationship between CNEPU and the commodity market mainly occurs in the short term. Quantile connectedness results show that economic policy uncertainty, which mainly plays the role of risk transmitter, is more closely related to the commodity market during the market boom and recession. Soybeans, soybean meal, and corn have shown high investment value in the process of market recovery, which is exposed to less risk spillover from policy uncertainty. Finally, the economic crisis with different characteristics will have specific impacts on asymmetric risk spillovers based on certain impact mechanisms.