IDEAS home Printed from https://ideas.repec.org/a/ebl/ecbull/eb-20-00241.html
   My bibliography  Save this article

Effect of Economic and Monetary Policy Uncertainty on stock markets. Evidence on return, volatility and liquidity

Author

Listed:
  • Jessica Paule-Vianez

    (Universidad Rey Juan Carlos)

  • Raúl Gómez-Martínez

    (Universidad Rey Juan Carlos)

  • Camilo Prado-Román

    (Universidad Rey Juan Carlos)

Abstract

This paper studies the effect of Economic Policy Uncertainty (EPU) and Monetary Policy Uncertainty (MPU) on the return, volatility and liquidity of the stock markets. Taking the S&P 500 and NASDAQ 100 as reference, it is demonstrated how these uncertainties influence the return and volatility and, to a lesser extent, the liquidity of these indexes. It has been found that EPU have a greater effect on return and volatility during periods of recession, having only an effect on liquidity during periods of expansion. In contrast, MPU influences return and volatility more during periods of expansion, and liquidity only during periods of recession. These findings demonstrate the existence of behavioural biases consistent with Behavioural Finance, as well as the importance of controlling uncertainty on the part of economic policy makers to avoid the damages that EPU and MPU can generate in the stock markets.

Suggested Citation

  • Jessica Paule-Vianez & Raúl Gómez-Martínez & Camilo Prado-Román, 2020. "Effect of Economic and Monetary Policy Uncertainty on stock markets. Evidence on return, volatility and liquidity," Economics Bulletin, AccessEcon, vol. 40(2), pages 1261-1271.
    • Handle: RePEc:ebl:ecbull:eb-20-00241
    as

    Download full text from publisher

    File URL: http://www.accessecon.com/Pubs/EB/2020/Volume40/EB-20-V40-I2-P107.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, June.
    2. Lucas F. Husted & John H. Rogers & Bo Sun, 2016. "Measuring Monetary Policy Uncertainty: The Federal Reserve, January 1985-January 2016," IFDP Notes 2016-04-11-2, Board of Governors of the Federal Reserve System (U.S.).
    3. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    4. 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.
    5. Mohamed Arouri & David Roubaud, 2016. "On the determinants of stock market dynamics in emerging countries: the role of economic policy uncertainty in China and India," Economics Bulletin, AccessEcon, vol. 36(2), pages 760-770.
    6. Ben S. Bernanke, 1983. "Irreversibility, Uncertainty, and Cyclical Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(1), pages 85-106.
    7. Vasia Panousi & Dimitris Papanikolaou, 2012. "Investment, Idiosyncratic Risk, and Ownership," Journal of Finance, American Finance Association, vol. 67(3), pages 1113-1148, June.
    8. Datar, Vinay T. & Y. Naik, Narayan & Radcliffe, Robert, 1998. "Liquidity and stock returns: An alternative test," Journal of Financial Markets, Elsevier, vol. 1(2), pages 203-219, August.
    9. Liu, Li & Zhang, Tao, 2015. "Economic policy uncertainty and stock market volatility," Finance Research Letters, Elsevier, vol. 15(C), pages 99-105.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rehman, Mobeen Ur & Sensoy, Ahmet & Eraslan, Veysel & Shahzad, Syed Jawad Hussain & Vo, Xuan Vinh, 2021. "Sensitivity of US equity returns to economic policy uncertainty and investor sentiments," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    2. Byomakesh Debata & Jitendra Mahakud, 2018. "Economic policy uncertainty and stock market liquidity," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 10(1), pages 112-135, April.
    3. Das, Debojyoti & Kannadhasan, M. & Bhattacharyya, Malay, 2019. "Do the emerging stock markets react to international economic policy uncertainty, geopolitical risk and financial stress alike?," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 1-19.
    4. Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis, 2010. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," Working Papers 2011_22, Business School - Economics, University of Glasgow, revised Apr 2011.
    5. Kang, Wensheng & Lee, Kiseok & Ratti, Ronald A., 2014. "Economic policy uncertainty and firm-level investment," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 42-53.
    6. Györfy Lehel & Madaras Szilárd, 2019. "The Influence of Self-Employment on Early-Stage Entrepreneurship in Romania. A Global Entrepreneurship Monitor-Based Analysis," Acta Universitatis Sapientiae, Economics and Business, Sciendo, vol. 7(1), pages 23-35, December.
    7. Assad Ullah & Xinshun Zhao & Chenghui Ye & Muhammad Abdul Kamal, 2024. "Impact of Economic Policy Uncertainty Shocks on China’s Stock Market Development: Evidence from Nonlinear Autoregressive Distributed Lag and Spectral Causality Approaches," SAGE Open, , vol. 14(3), pages 21582440241, September.
    8. Caixe, Daniel Ferreira, 2022. "Corporate governance and investment sensitivity to policy uncertainty in Brazil," Emerging Markets Review, Elsevier, vol. 51(PB).
    9. Apergis, Nicholas, 2015. "Policy risks, technological risks and stock returns: New evidence from the US stock market," Economic Modelling, Elsevier, vol. 51(C), pages 359-365.
    10. Smales, Lee A., 2020. "Examining the relationship between policy uncertainty and market uncertainty across the G7," International Review of Financial Analysis, Elsevier, vol. 71(C).
    11. Luu Duc Huynh, Toan, 2020. "The effect of uncertainty on the precious metals market: New insights from Transfer Entropy and Neural Network VAR," Resources Policy, Elsevier, vol. 66(C).
    12. Christos Floros & Emilios Galariotis & Konstantinos Gkillas & Efstathios Magerakis & Constantin Zopounidis, 2024. "Time-varying firm cash holding and economic policy uncertainty nexus: a quantile regression approach," Annals of Operations Research, Springer, vol. 341(2), pages 859-895, October.
    13. William, Mbanyele & Fengrong, Wang, 2022. "Economic policy uncertainty and industry innovation: Cross country evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 208-228.
    14. Ali, Sara & Badshah, Ihsan & Demirer, Riza & Hegde, Prasad, 2022. "Economic policy uncertainty and institutional investment returns: The case of New Zealand," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    15. Cristiane Gea & Marcelo Cabus Klotzle & Luciano Vereda & Antonio Carlos Figueiredo Pinto, 2023. "Pricing uncertainty in the Brazilian stock market: do size and sustainability matter?," SN Business & Economics, Springer, vol. 3(1), pages 1-37, January.
    16. Al-Thaqeb, Saud Asaad & Algharabali, Barrak Ghanim, 2019. "Economic policy uncertainty: A literature review," The Journal of Economic Asymmetries, Elsevier, vol. 20(C).
    17. Caroline Perrin & Laurent Weill, 2024. "Girls will be girls? The gendered effect of economic policy uncertainty on corporate investment," Applied Economics, Taylor & Francis Journals, vol. 56(9), pages 997-1011, February.
    18. Florackis, Chris & Kostakis, Alexandros & Kontonikas, Alexandros, 2011. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," SIRE Discussion Papers 2011-31, Scottish Institute for Research in Economics (SIRE).
    19. Chatterjee, Ujjal K., 2016. "Do stock market trading activities forecast recessions?," Economic Modelling, Elsevier, vol. 59(C), pages 370-386.
    20. Marina Riem, 2016. "Corporate investment decisions under political uncertainty," ifo Working Paper Series 221, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

    More about this item

    Keywords

    Economic Policy Uncertainty; Monetary Policy Uncertainty; Behavioural Finance; Stock markets; Economic cycles;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ebl:ecbull:eb-20-00241. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: John P. Conley (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.