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Country-level energy-related uncertainties and stock market returns: Insights from the U.S. and China

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  • Zhang, Xincheng

Abstract

Scholars have widely acknowledged the influence of energy on stock market returns, yet the role of energy-related uncertainty in the stock market remains to be explored. This study employs scaled principal component analysis (sPCA), partial least squares (PLS), and principal component analysis (PCA) techniques to investigate the impact of country-level energy-related uncertainty indices (EUIs) on stock market returns. The results indicate that an EUI contains prediction information for U.S. and Chinese stock market returns. Furthermore, the diffusion index derived from all EUIs utilizing supervised dimensionality reduction methods (sPCA and PLS) facilitates predicting stock market returns better and more robustly than country-level EUIs and traditional macroeconomic predictors. The results of the economic value assessment also indicate that models considering the EUI diffusion index tend to yield greater economic value than models considering individual EUIs or traditional predictive factors. Our results emphasize the significance of the EUI diffusion index in predicting stock market returns, providing valuable guidance for portfolio management and decision-making for market stakeholders.

Suggested Citation

  • Zhang, Xincheng, 2024. "Country-level energy-related uncertainties and stock market returns: Insights from the U.S. and China," Technological Forecasting and Social Change, Elsevier, vol. 204(C).
    • Handle: RePEc:eee:tefoso:v:204:y:2024:i:c:s0040162524002336
    DOI: 10.1016/j.techfore.2024.123437
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    Keywords

    Stock market returns; Energy-related uncertainties; Supervised dimensionality reduction technique;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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