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How Does the Economic Uncertainty Affect Asset Prices under Normal and Financial Distress Times?

Author

Listed:
  • Balcilar, Mehmet

    (Eastern Mediterranean University)

  • Ozdemir, Zeynel Abidin

    (Ankara HBV University)

  • Ozdemir, Huseyin

    (Gazi University)

  • Aygun, Gurcan

    (Gazi University)

  • Wohar, Mark E.

    (University of Nebraska Omaha)

Abstract

By using a nonlinear VAR model, we investigate whether the response of the US stock and housing markets to uncertainty shocks depends on financial conditions. Our model allows us to change the response of the US financial markets to volatility shocks in periods of normal and financial distress. We find strong evidence that uncertainty shocks have adverse effects on the US financial markets, irrespective of financial conditions. Moreover, our empirical results show that the rebound in US housing prices, which fell sharply in the economic turmoil, is state-dependent. This reflects the Fed's expansionary monetary policy to stabilize the US housing market. Furthermore, our findings reveal that economic agents who closely monitor the impact of uncertainty on the US stock and housing markets should also consider financial frictions in the US economy.

Suggested Citation

  • Balcilar, Mehmet & Ozdemir, Zeynel Abidin & Ozdemir, Huseyin & Aygun, Gurcan & Wohar, Mark E., 2022. "How Does the Economic Uncertainty Affect Asset Prices under Normal and Financial Distress Times?," IZA Discussion Papers 15296, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15296
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    References listed on IDEAS

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    More about this item

    Keywords

    asset prices; economic uncertainty; financial conditions; regime switching; US;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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