The impact of economic policy uncertainty and commodity prices on CARB country stock market volatility

Basher, Syed Abul and Haug, Alfred A. and Sadorsky, Perry (2019): The impact of economic policy uncertainty and commodity prices on CARB country stock market volatility.

Abstract

This paper investigates the impact of economic policy uncertainty shocks and shocks to commodity prices on the realized stock market volatility of the CARB (Canada, Australia, Russia, and Brazil) countries. The CARB countries are important countries to study because they are major commodity exporters. The analysis is conducted using sign restricted impulse response functions (IRFs) and structural vector-autoregressive IRFs. There are some common results across the CARB countries. A positive shock to commodity prices lowers realized stock market volatility while a shock to economic policy uncertainty has a significant positive impact on realized stock market volatility. The magnitudes of the initial impact of these two shocks are similar. Shocks to global economic activity and short-term interest rates lower realized stock market volatility. The impacts of these shocks are more pronounced in models that use sign restrictions. These results have implications for investors and policy makers.

• Item Type: MPRA Paper
• Language: English
• Keywords: Economic policy uncertainty; commodity prices; stock market volatility, sign restricted VAR.
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation

References

Arouri, M, Estay, C, Rault, C and Roubaud, D (2016). Economic policy uncertainty and stock markets: Long-run evidence from the US. Finance Research Letters 18, 136–141. Baker, SR, Bloom, N and Davis, SJ (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics 131, 1593-1636.

Basher, SA, Haug, AA and Sadorsky, P (2018). The impact of oil-market shocks on stock returns in major oil-exporting countries. Journal of International Money and Finance 86, 264-280.

Bastianin, A, Conti, F and Manera, M (2016). The impacts of oil price shocks on stock market volatility: Evidence from the G7 countries. Energy Policy 98, 160-169.

Baumeister, C and Hamilton, J (2013). Sign restrictions, structural vector autoregressions, and useful prior information. Econometrica 83, 1963-99.

Baumeister, C and Kilian, L (2016). Forty years of oil price fluctuations: Why the price of oil may still surprise us. Journal of Economic Perspectives 30, 139-160.

Bekiros, S, Gupta, R and Kyei, C (2016a). On economic uncertainty, stock market predictability and nonlinear spillover effects. The North American Journal of Economics and Finance 36, 184–191.

Bekiros, S, Gupta, R and Majumdar, A (2016b). Incorporating economic policy uncertainty in US equity premium models: A nonlinear predictability analysis. Finance Research Letters 18, 291–296.

Bjørnland, HC (2009). Oil price shocks and stock market booms in an oil exporting Country. Scottish Journal of Political Economy 56, 232-254.

Brogaard, J and Detzel, A (2015). The asset-pricing implications of government economic policy uncertainty. Management Science 61, 3–18.

Chen, J, Jiang, F and Tong, G (2017). Economic policy uncertainty in China and stock market expected returns. Accounting and Finance 57, 1265–1286.

Christou, C, Cunado, J, Gupta, R and Hassapis, C (2017). Economic policy uncertainty and stock market returns in Pacific-Rim countries: Evidence based on a Bayesian panel VAR model. Journal of Multinational Financial Management 40, 92-102.

Creti, A, Joëts, M and Mignon, V (2013). On the links between stock and commodity markets' volatility. Energy Economics 37, 16-28.

Dakhlaoui, I and Aloui, C (2016). The interactive relationship between the US economic policy uncertainty and BRIC stock markets. International Economics 146, 141–157.

Degiannakis, S, Filis, G and Kizys, R (2014). The effects of oil price shocks on stock market volatility: Evidence from European data. Energy Journal 35, 35-56.

Ferreira, TSV, Xavier, GC and Martins, OS (2018). Political uncertainty and risk premium in the Brazilian stock market. Journal of Financial Innovation, early view. doi: https://doi.org/10.15194/jofi_2017.

Fisher, I (1930). The Theory of Interest. Macmillan, New York, NY.

Fry, R and Pagan, A (2011). Sign restrictions in structural vector autoregressions: A critical review. Journal of Economic Literature 49, 938-960.

Jones, C and Kaul, G (1996). Oil and the stock markets. Journal of Finance 51, 463-91.

Kang, W and Ratti, RA (2013). Oil shocks, policy uncertainty and stock market return. Journal of International Financial Markets, Institutions and Money 26, 305-318.

Kang, W, Ratti, RA and Vespignani, J (2018). Global commodity prices and global stock volatility shocks. MPRA Paper No. 84250, https://mpra.ub.uni-muenchen.de/84250/ (last accessed 15 May 2019).

Kang, W, Ratti, RA and Yoon, KH (2015). The impact of oil price shocks on the stock market return and volatility relationship. Journal of International Financial Markets, Institutions and Money 34, 41-54.

Kilian, L (2009). Not all oil price shocks are alike: disentangling demand and supply shocks in the crude oil market. American Economic Review 99, 1053-1069.

Kilian, L and Lütkepohl, H ( 2017). Structural Vector Autoregressive Analysis. Cambridge: Cambridge University Press.

Kilian, L and Park, C (2009). The impact of oil price shocks on the U.S. stock market. International Economic Review 50, 1267-1287.

Kilian, L and Zhou, X (2018). Measuring fluctuations in the global demand for commodities. Journal of International Money and Finance 88, 54-78.

Koop, G and Korobilis, D (2015). Forecasting with high dimensional panel VARs. Business School-Economics, University of Glasgow, Working Paper No. 2015-25.

Li, X.-M., Peng, L. (2017). US economic policy uncertainty and co-movements between Chinese and US stock markets. Economic Modelling 61, 27–39.

Liu, L and Zhang, T (2015). Economic policy uncertainty and stock market volatility. Finance Research Letters 15, 99-105.

Mountford, A and Uhlig, H (2009). What are the effects of fiscal policy shocks? Journal of Applied Econometrics 24, 960-992.

Ozturk, EO and Sheng, XS (2018). Measuring global and country-specific uncertainty. Journal of International Money and Finance 88, 276–295.

Pastor, L and Veronesi, P (2013). Political uncertainty and risk premia. Journal of Financial Economics 110, 520-545.

Pastor, L and Veronesi, P (2012). Uncertainty about government policy and stock prices. Journal of Finance 67, 1219-1264.

Paye, BS (2012). Deja vol: Predictive regressions for aggregate stock market volatility using macroeconomic variables. Journal of Financial Economics 106, 527-548.

Schwert, G (1989).Why does stock market volatility change over time? Journal of Finance 44, 1115-1153.

Sims, C (1988). Bayesian skepticism on unit root econometrics. Journal of Economic Dynamics and Control 12, 463-474.

Smyth, R and Narayan, PK (2018). What do we know about oil prices and stock returns? International Review of Financial Analysis 57, 148-156.

Tsai, I.-C. (2017). The source of global stock market risk: A viewpoint of economic policy uncertainty. Economic Modelling 60, 122–131. 2

Uhlig, H (2005). What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics 52, 381-419.

Wong, B (2015). Do inflation expectations propagate the inflationary impact of real oil price shocks? Evidence from the Michigan Survey. Journal of Money, Credit and Banking 47, 1673-1689.

Yu, H, Fang, L and Sun, B (2018). The role of global economic policy uncertainty in long-run volatilities and correlations of U.S. industry-level stock returns and crude oil. PLoS ONE 13, 1-17.

Xavier, G and Vasconcelos, LNC (2018). Economic policy uncertainty and momentum: International evidence. https://ssrn.com/abstract=3187600 (last accessed 15 May 2019).