Does global economic uncertainty matter for the volatility and hedging effectiveness of Bitcoin?

We assess whether the long-run volatilities of Bitcoin, global equities, commodities, and bonds are affected by global economic policy uncertainty. Empirical results provide evidence supporting this hypothesis, except in the case of bonds. For Bitcoin investors, the results imply the ability to use information about the state of global economic uncertainty to enhance the predictions of Bitcoin volatility. We further examine whether the correlation between Bitcoin and global equities, commodities, and bonds are affected by global economic policy uncertainty. Empirical results reveal that global economic policy uncertainty has a negative significant impact on the Bitcoin-bonds correlation and a positive impact on both Bitcoin-equities and Bitcoin-commodities correlations, suggesting the possibility of Bitcoin acting as a hedge under specific economic uncertainty conditions. Interestingly, the hedging effectiveness of Bitcoin for both global equities and global bonds enhances slightly after considering the level of global economic policy uncertainty. Such a weak effect of the state of global economic uncertainty on the hedging ability of Bitcoin implies that investors cannot substantially enhance the hedging performance of Bitcoin under different economic uncertainty conditions.     

Does economic policy uncertainty drive nonlinear risk spillover in the commodity futures market?

We propose the rolling tail-event driven network technique (RTENET) to measure the dynamic nonlinear tail risk spillover of 20 US commodity futures. In addition, we investigate the effect of economic policy uncertainty (EPU) on risk spillover based on quantile-on-quantile regression (QQR). We find that the risk spillover effect increases sharply and that the market is tightly connected when EPU is at a high level. Crude oil, silver and corn, the three greatest risk transmitters in the system, need more attention. More importantly, the effect of EPU on the risk spillover of the commodity futures market is asymmetric and heterogeneous. When the risk spillover falls within extremely high quantiles, a significant positive effect of EPU is observed. In addition, grain and soft crops are more sensitive to EPU. Our findings provide a reference for policy-makers and investors to manage commodity futures markets in different uncertainty periods.     

Does economic policy uncertainty drive the initiation of corporate lobbying?

Economic policy uncertainty (EPU) raises firms' incentives to lobby policymakers to access policy information and influence policy outcomes. Surprisingly, we find that non-lobbying firms are less likely to initiate lobbying during periods of heightened EPU. The evidence is consistent with our time-varying barriers hypothesis that entry barriers to lobbying increase with EPU. We verify that the negative effect of EPU on lobbying initiation arises through the channels of lobbying entry expenses and returns to experience. Furthermore, lobbying entry expenses are not large, implying that the returns to experience channel is likely a more serious barrier preventing non-lobbying firms from initiating lobbying. We also find that facing high lobbying entry barriers, non-lobbying firms go for alternative political activities, such as hiring politically connected directors.     

How does economic policy uncertainty affect the bitcoin market?

This paper examines how economic policy uncertainty (EPU) impacts the Bitcoin (BTC) markets denominated in local currencies. We take BTC against British Pound (GBP) and the United States dollar (USD) as examples and construct the value-weighted BTC/GBP and BTC/USD composite indices. Our results show that the returns around the highest EPU days are significantly greater than those around the lowest EPU days. Further, the United States (US) EPU increases the volatility and trading volume of BTC after EPU spike days, whereas the United Kingdom (UK) EPU does not show such trends. Moreover, we observe a spillover effect for the US EPU to the UK BTC market. We further construct the dynamic conditional correlation (DCC)-GARCH model to test the dynamic correlation between EPU and BTC. Our results show that the effect of the US EPU on BTC/USD is greater than the effect of the UK EPU on BTC/GBP. Our empirical findings may provide insights for regulators to intervene in speculations in cryptocurrency markets effectively.     

How does long-term finance affect economic volatility?

In an approach analogous to Rajan and Zingales (1998), we examine how the ability to access long-term debt affects firm-level growth volatility. We find that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods.     

How do investors react under uncertainty?

It has long been accepted that risk plays an important role in determining valuation where risk reflects that investors are unsure of future returns but are able to express their prior expectations by a probability distribution of these returns. Knight (1921) introduced the concept of uncertainty where investors possess incomplete knowledge about this distribution and so are unable to formulate priors over all possible outcomes. One common approach for making uncertainty tractable is to assume that investors faced with uncertainty will base their decisions on the worst case scenario (i.e. follow maxmin expected utility). As a consequence it is postulated that investors will become more pessimistic as uncertainty increases, upgrading bad news and downgrading good news. Using Australian data, we find evidence that investors react to bad news at times of high market uncertainty but largely ignore good news which is consistent with them taking on a pessimistic bias. However, we also find evidence of the reverse when market uncertainty is low with investors taking on an optimistic stance by ignoring bad news but reacting to good news. We also find that the impact that market uncertainty has on the reaction of investors to new information is modified by the prevailing market sentiment at the time of the announcement. Besides throwing light on the question of how uncertainty impacts on investor behaviour, our findings seriously challenge the common assumption made that investors consistently deal with uncertainty by applying maxmin expected utility.     

Does economic policy uncertainty affect cryptocurrency markets? Evidence from Twitter-based uncertainty measures

Using daily data from August 9, 2015, to July 7, 2020, this study examines the effects of economic policy uncertainty (EPU) on the returns of four cryptocurrencies: Bitcoin, Ethereum, Litecoin, and Ripple. To this end, two new measures of EPU (Twitter-based economic uncertainty and Twitter-based market uncertainty) are considered. A Granger causality test using the recursive evolving window approach shows a significant causality between the Twitter-based EPU measures and the BTC/USD exchange rate from October 2016 to July 2017. Moreover, a significant causality was noted from the EPU measures to the ETH/USD exchange rate from June 2019 to February 2020 and from the EPU measures to the XRP/USD exchange rate from January 2020 to February 2020. The Twitter-based EPU measures primarily positively affect the returns of the related cryptocurrencies during these periods. These results are robust to different measures of Twitter-based EPU and different econometric techniques. Potential implications, including the COVID-19 era, are also discussed.     

How well do investor sentiment and ensemble learning predict Bitcoin prices?

Investor sentiment is widely recognized as the major determinant of cryptocurrency prices. Although earlier research has revealed the influence of investor sentiment on cryptocurrency prices, it has not yet generated cohesive empirical findings on an important question: How effective is investor sentiment in predicting cryptocurrency prices? To address this gap, we propose a novel prediction model based on the Bitcoin Misery Index, using trading data for cryptocurrency rather than judgments from individuals who are not Bitcoin investors, as well as bagged support vector regression (BSVR), to forecast Bitcoin prices. The empirical analysis is performed for the period between March 2018 and May 2022. The results of this study suggest that the addition of the sentiment index enhances the predictive performance of BSVR significantly. Moreover, the proposed prediction system, enhanced with an automatic feature selection component, outperforms state-of-the-art methods for predicting cryptocurrency for the next 30 days.     

Does economic policy uncertainty drive the dynamic spillover among traditional currencies and cryptocurrencies? The role of the COVID-19 pandemic

The paper examines the dynamic spillover among traditional currencies and cryptocurrencies before and during the COVID-19 pandemic and investigates whether economic policy uncertainty (EPU) impacts this spillover. Based on the TVP-VAR approach, we find evidence of spillover effects among currencies, which increased widely during the pandemic. In addition, results suggest that almost all cryptocurrencies remain as “safe-haven” tools against market uncertainty during the COVID-19 period. Moreover, comparative analysis shows that the total connectedness for cryptocurrencies is lower than for traditional currencies during the crisis. Further analysis using quantile regression suggests that EPU exerts an impact on the total and the net spillovers with different degrees across currencies and this impact is affected by the health crisis. Our findings have important policy implications for policymakers, investors, and international traders.     

Geopolitical,economic uncertainty and bank risk: Do CEO power and board strength matter?

This study examines whether economic and geopolitical uncertainties affect bank risk. Using a sample of 574 banks from 19 countries for 2009–2020, our findings show that increasing economic and geopolitical uncertainty significantly constrain the bank risk and worsens its stability. Furthermore, we explore whether CEO power and board strength have played a moderate role in mitigating the adverse impact of economic and geopolitical uncertainty on bank risk. The finding shows that CEOs' power and strong boards improve the bank's performance and minimize the adverse effects of economic and geopolitical uncertainty on bank risk. The results are robust to alternative bank risk, economic uncertainty, and geopolitical uncertainty measures and address endogeneity. Additional analyses on bank heterogeneity show that the bank stability of listed, domestic and private-owned banks is more immune to such uncertainty.     

What do asset prices have to say about risk appetite and uncertainty?

Building on intuition from the dynamic asset pricing literature, we uncover unobserved risk aversion and fundamental uncertainty from the observed time series of the variance premium and the credit spread while controlling for the conditional variance of stock returns, expectations about the macroeconomic outlook, and interest rates. We apply this methodology to monthly data from both Germany and the US. We find that the variance premium contains a substantial amount of information about risk aversion whereas the credit spread has a lot to say about uncertainty. We link our risk aversion and uncertainty estimates to practitioner and “academic” risk aversion indices, sentiment indices, financial stress indices, business cycle indicators and liquidity measures.     

How and why do small firms manage interest rate risk?

Although small firms are particularly sensitive to interest rates and other shocks, empirical work on corporate risk management has focused instead on large public companies. This paper studies fixed-rate and adjustable-rate loans to see how small firms manage their exposure to interest rate risk. Credit-constrained firms are found to match significantly more often with fixed-rate loans, consistent with prior research that shows the supply of credit shrinks during periods of rising interest rates. Banks originate a higher share of adjustable-rate loans than other lenders, ameliorating maturity mismatch and exposure to the lending channel of monetary policy. Time-series patterns in the fixed-rate share are consistent with recent evidence on debt market timing.     

Forecasting crude oil volatility with geopolitical risk: Do time-varying switching probabilities play a role?

This study examines whether geopolitical risk (GPR) exhibits an ability to forecast crude oil volatility from a time-varying transitional dynamics perspective. Unlike previous studies that assume an oversimplification of the fixed transition probabilities for crude oil volatility, we develop an asymmetric time-varying transition probability Markov regime switching (AS-TVTP-MS) GARCH model. In-sample estimated results show that GPR yields strong evidence of regime switching behavior on crude oil volatility and that the negative shocks of GPR result in greater effects on switching probabilities than positive shocks. Out-of-sample results indicate that the AS-TVTP-MS GARCH model containing the GPR index outperforms other models, suggesting that the consideration of GPR information and time-varying regime switching together results in superior predictive performance. Moreover, the predictability of oil volatility is further verified to be economically significant in the framework of portfolio allocation. In addition, our results are robust to various settings.     

Does economic policy uncertainty raise corporate precautionary cash holdings? Evidence from China

Using China as the research setting, this paper investigates the relationship between economic policy uncertainty and corporate precautionary cash holdings. Empirical results show a U-shaped relation between economic policy uncertainty and corporate precautionary cash holdings. Empirical analysis, in terms of ownership structure, firm size, corporate competitiveness and geographical location, further shows that (i) the effects for economic policy uncertainty in both state-owned and non-state-owned enterprises are significant, but the effect is stronger for state-owned enterprises; (ii) such significant effect is also found more strongly in small and medium-sized enterprises and highly competitive enterprises; and (iii) the effects for eastern, central and western China are all statistically significant, but the effect is strongest for eastern China.     

When to go abroad: economic policy uncertainty and Chinese firms’ overseas investment

We study how economic policy uncertainty (EPU) influences firms’ overseas investments for Chinese listed companies. We find a significant negative relationship between EPU and firms’ overseas investments after controlling for firm characteristics and macroeconomic variables. Chinese firms seem to reduce their overseas investments on fixed income securities when facing domestic policy uncertainty. The negative relationship is pronounced for financially constrained firms, firms relying on government subsidies and with low overseas revenues, and SOEs. Firms operating in high marketisation regions can mitigate the negative effect of EPU on firms’ overseas investments. Our results remain significant when considering endogeneity problems.     

Do green bonds and economic policy uncertainty matter for carbon price? New insights from a TVP-VAR framework

Green bond shocks and economic policy uncertainty are essential factors affecting macroeconomic development and green finance. In this paper, the time-varying parameter vector autoregressive (TVP-VAR) framework is used to analyze the monthly data of China from April 2014 to March 2022 and to investigate the dynamic impact of green bond shock and economic policy uncertainty on carbon prices. The results show that economic policy uncertainty and the impact of the green bond have significant time-varying and short-term effects on carbon price. In the short term, economic policy uncertainty has a significant positive impact on carbon price most of the time, while green bond has a significant negative impact on carbon price most of the time. Meanwhile, economic policy uncertainty and the impact of green bond on carbon price in Hubei and Guangdong are heterogeneous. In addition, we also use Bayesian VAR (BVAR) model to test the robustness of the results. Based on the research results, some policy suggestions are put forward, including improving the stability of economic policies, implementing green bond support policies, and speeding up the improvement of the national unified carbon emission trading market.     

Does economic policy uncertainty matter for financial reporting quality? Evidence from the United States

Review of Quantitative Finance and Accounting - We examine the effect of economic policy uncertainty (EPU) on the financial reporting quality of US firms over 1999–2015. We use accruals-based...     

Do Chinese firms speculate during high economic policy uncertainty? Evidence from wealth management products

It has been well-documented that policy-related uncertainty has significant economic consequences. Studies show that US firms tend to delay investments and be conservative during periods of high economic policy uncertainty (EPU), but findings regarding Chinese firms suggest that they seem to act speculatively. This study examines the impact of policy uncertainty on firms' bank wealth management product (WMP) purchasing and helps better understand firm behaviour during high EPU. Using Chinese listed firms' bank WMPs purchasing data, we find that high EPU is associated with a higher probability of bank WMPs being purchased. Moreover, a 100% increase in EPU is associated with an 11.14% increase in average bank WMP holdings in the sample. We provide evidence that Chinese firms are not speculative, but prudent, and use bank WMP holdings to hedge the risk of policy uncertainty. Additionally, we show that financial constraints are the channels through which EPU affects bank WMP holdings.     

Does geopolitical uncertainty affect corporate financing? Evidence from MIDAS regression

This paper investigates the effect of geopolitical uncertainty on (market) leverage ratio, debt maturity, and choice of debt source. Using a new monthly index of geopolitical uncertainty and annual data for corporate financing variables, we find that under geopolitical uncertainty firms tend to reduce debt and increase market leverage. We argue that this increase is driven by asymmetrical reductions in the numerator (total debt) and the denominator (total debt and equity) of the leverage ratio. Under geopolitical uncertainty, firms tend to shorten their debt maturity structure and—especially those firms with lower credit quality—to substitute bank debt for public debt.