TY - JOUR
T1 - Examining the relationship between policy uncertainty and market uncertainty across the G7
AU - Smales, Lee A.
PY - 2020/10
Y1 - 2020/10
N2 - Economic policy uncertainty (EPU) relates to ambiguity surrounding possible changes in government policy and their associate impact on firm performance. This uncertainty places additional stress on economic agents and has implications for the global economy via delays in firm investment and hiring, and postponement of household consumption. We utilise the EPU measure of Baker et al. (2016) to investigate whether financial market uncertainty is related to policy uncertainty across the G7 economies. Our empirical results show that financial market uncertainty (implied volatility) increases as economic policy uncertainty increases (and the economy weakens). This relationship holds even after controlling for macroeconomic state variables and country/time fixed effects, and is consistent for monthly and daily data frequency. The correlation of political uncertainty among countries varies over time, increasing in tranquil times with low EPU, and sharply decreasing during times of crisis. We also show that US and Japanese policy uncertainty has an economic and statistically significant relationship with global financial market uncertainty, a spill-over effect that is consistent with the size of their economies, and the important role that US policy decisions play in the global economy.
AB - Economic policy uncertainty (EPU) relates to ambiguity surrounding possible changes in government policy and their associate impact on firm performance. This uncertainty places additional stress on economic agents and has implications for the global economy via delays in firm investment and hiring, and postponement of household consumption. We utilise the EPU measure of Baker et al. (2016) to investigate whether financial market uncertainty is related to policy uncertainty across the G7 economies. Our empirical results show that financial market uncertainty (implied volatility) increases as economic policy uncertainty increases (and the economy weakens). This relationship holds even after controlling for macroeconomic state variables and country/time fixed effects, and is consistent for monthly and daily data frequency. The correlation of political uncertainty among countries varies over time, increasing in tranquil times with low EPU, and sharply decreasing during times of crisis. We also show that US and Japanese policy uncertainty has an economic and statistically significant relationship with global financial market uncertainty, a spill-over effect that is consistent with the size of their economies, and the important role that US policy decisions play in the global economy.
KW - Economic policy uncertainty
KW - EPU
KW - Financial market uncertainty
KW - Implied volatility
KW - VIX
UR - http://www.scopus.com/inward/record.url?scp=85086922422&partnerID=8YFLogxK
U2 - 10.1016/j.irfa.2020.101540
DO - 10.1016/j.irfa.2020.101540
M3 - Article
AN - SCOPUS:85086922422
VL - 71
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
SN - 1057-5219
M1 - 101540
ER -