Dynamic Co-movements between Stock Market Returns and Policy Uncertainty

Antonakakis, Nikolaos and Chatziantoniou, Ioannis and Filis, George (2012): Dynamic Co-movements between Stock Market Returns and Policy Uncertainty.

Abstract

In this paper we examine the extent of time-varying correlations between stock markets returns and policy uncertainty based on a newly introduced uncertainty index by Baker et al. (2012). We identify several empirical regularities: (1) the dynamic correlations of policy uncertainty and stock market returns are consistently negative. (2) Increased stock market volatility increases policy uncertainty and dampens stock markets returns. (3) Increases in the volatility of policy uncertainty lead to negative stock market returns and increased uncertainty. (4) Oil specific demand shocks and domestic shocks (price and income shocks) lead to further increase in the negative correlation between policy uncertainty and stock market returns.

• Item Type: MPRA Paper
• Language: English
• Keywords: Policy uncertainty; dynamic correlation; stock market return; oil shock
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E66 - General Outlook and Conditions; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; G - Financial Economics > G1 - General Financial Markets > G10 - General; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General

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