The transmission of US economic policy uncertainty shocks to Asian and global financial markets |
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Institution: | 1. School of Finance, Jiangxi University of Finance and Economics, China;2. Department of Economics and Finance, Southern Illinois University Edwardsville, United States;3. International Institute for Financial Studies and RCFMRP, Jiangxi University of Finance and Economics, China |
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Abstract: | 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. |
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Keywords: | Spillover Economic policy uncertainty Factor-augmented vector autoregression (FAVAR) Asian financial markets G15 G18 |
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