Do U.S. and Japanese uncertainty shocks play important roles in affecting transition mechanisms of Japanese stock market?

This research investigates the impacts of U.S. and Japanese uncertainty shocks on the transition mechanisms of the Japan stock market dynamics by utilizing the Markov-switching GARCH-jump model with a time-varying transition probability matrix and analyzes the economic policy uncertainty shock of Japan, the economic policy uncertainty shock of the U.S., and the uncertainty shock about the U.S. equity market volatility. The empirical results demonstrate that the Japan stock market responds to most shocks with the exception of the U.S. economic policy uncertainty shock. The equity market volatility shock of the U.S. plays a more crucial role than the economic policy uncertainty shock of Japan. Furthermore, an increase in the U.S. equity market volatility shock reveals totally different signals in different volatile states. It signals an adverse belief about the Japan stock market in a high-volatile state, but signals an optimism viewpoint about the Japan stock market in a low-volatile state. Finally, the impact of the uncertainty shock about the U.S. stock market volatility is stronger in a high-volatile market than in a low-volatile market.