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Pricing the common stocks in emerging markets: The role of economic policy uncertainty

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  • Orbay Arkol
  • Asil Azimli

Abstract

We examine the role of news-based policy uncertainty measures in capturing the cross-section of average stock returns in emerging markets. After controlling for the five established risk factors of Fama and French (FF), we find that policy uncertainty factors are redundant in capturing the average returns of portfolios constructed by considering well-known firm characteristics (size, book-to-market ratio, profitability, and investment). The pricing performance of the five factors model, both statistically and economically, does not improve with the addition of policy uncertainty factors. We argue that the news-based factors' information content is contained in FF risk factors. Our results are robust to additional test statistics and various policy uncertainty factors.

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  • Orbay Arkol & Asil Azimli, 2024. "Pricing the common stocks in emerging markets: The role of economic policy uncertainty," Modern Finance, Modern Finance Institute, vol. 2(1), pages 31-50.
    • Handle: RePEc:bdy:modfin:v:2:y:2024:i:1:p:31-50:id:93
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    References listed on IDEAS

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    1. Lubos Pástor & Pietro Veronesi, 2012. "Uncertainty about Government Policy and Stock Prices," Journal of Finance, American Finance Association, vol. 67(4), pages 1219-1264, August.
    2. Maquieira, Carlos P. & Espinosa-Méndez, Christian & Gahona-Flores, Orlando, 2023. "How does economic policy uncertainty (EPU) impact copper-firms stock returns? International evidence," Resources Policy, Elsevier, vol. 81(C).
    3. Ahn, Dong-Hyun & Min, Byoung-Kyu & Yoon, Bohyun, 2019. "Why has the size effect disappeared?," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 256-276.
    4. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    5. Xu, Yongan & Wang, Jianqiong & Chen, Zhonglu & Liang, Chao, 2021. "Economic policy uncertainty and stock market returns: New evidence," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    6. Titman, Sheridan & Wei, K. C. John & Xie, Feixue, 2004. "Capital Investments and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(4), pages 677-700, December.
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