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Hossein Asgharian. Photo.

Hossein Asgharian

Professor

Hossein Asgharian. Photo.

Economic Policy Uncertainty and Long-Run Stock Market Volatility and Correlation

Author

  • Hossein Asgharian
  • Charlotte Christiansen
  • Ai Jun Hou

Summary, in English

We use Baker, Bloom, and Davis’s (2016) economic policy uncertainty indices in combination with the mixed data sampling (MIDAS) approach to investigate long-run stock market volatility and correlation, primarily for the US and UK. Long-run US–UK stock market correlation depends positively on US economic policy uncertainty shocks. The dependence is asymmetric, with only positive shocks - increasing uncertainty - being of importance. The US long-run stock market volatility depends significantly on US economic policy uncertainty shocks but not on UK shocks, while the UK long-run stock market volatility depends significantly on both. Allowing for US economic policy uncertainty shocks improves the out-of-sample forecasting of US–UK stock market correlation and enhances portfolio performance. Similar results apply to the long-run correlation between the US and Canada, China, and Germany.

Department/s

  • Department of Economics

Publishing year

2018

Language

English

Document type

Other

Topic

  • Economics

Status

Unpublished