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Preventing crash in stock market: The role of economic policy uncertainty during COVID-19

Author

Listed:
  • Peng-Fei Dai

    (Tianjin University
    East China University of Science and Technology)

  • Xiong Xiong

    (Tianjin University)

  • Zhifeng Liu

    (Hainan University)

  • Toan Luu Duc Huynh

    (WHU-Otto Beisheim School of Management
    University of Economics Ho Chi Minh City)

  • Jianjun Sun

    (Hainan University)

Abstract

This paper investigates the impact of economic policy uncertainty (EPU) on the crash risk of US stock market during the COVID-19 pandemic. To this end, we use the GARCH-S (GARCH with skewness) model to estimate daily skewness as a proxy for the stock market crash risk. The empirical results show the significantly negative correlation between EPU and stock market crash risk, indicating the aggravation of EPU increase the crash risk. Moreover, the negative correlation gets stronger after the global COVID-19 outbreak, which shows the crash risk of the US stock market will be more affected by EPU during the epidemic.

Suggested Citation

  • Peng-Fei Dai & Xiong Xiong & Zhifeng Liu & Toan Luu Duc Huynh & Jianjun Sun, 2021. "Preventing crash in stock market: The role of economic policy uncertainty during COVID-19," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-15, December.
    • Handle: RePEc:spr:fininn:v:7:y:2021:i:1:d:10.1186_s40854-021-00248-y
    DOI: 10.1186/s40854-021-00248-y
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    More about this item

    Keywords

    COVID-19; Economic policy uncertainty; Crash risk; Skewness;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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