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

Asgharian, Hossein LU ; Christiansen, Charlotte and Hou, Ai Jun (2018)
Abstract
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... (More)
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. (Less)
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unpublished
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English
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yes
id
a03779a7-0ec6-477f-b1b8-f91c93e18e28
alternative location
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3146924
date added to LUP
2018-05-05 12:05:14
date last changed
2018-05-17 10:37:29
@misc{a03779a7-0ec6-477f-b1b8-f91c93e18e28,
  abstract     = {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.},
  author       = {Asgharian, Hossein and Christiansen, Charlotte and Hou, Ai Jun},
  language     = {eng},
  title        = {Economic Policy Uncertainty and Long-Run Stock Market Volatility and Correlation},
  year         = {2018},
}