A news-based economic policy uncertainty index for Nigeria

In this study, we develop the first daily news-based economic policy uncertainty [EPU] index for the largest economy in Africa which was hitherto suppressed in the various EPU indices published in recent times. With the renewed interest in Africa as an important destination for investments from developed economies/regions such as Europe, the US, and the UK as well as emerging economies such as China, India, and Russia, among others, in which Nigeria is strategically positioned to benefit from, the need to track the extent of economic uncertainties for the country becomes crucial for investment and policy. Thus, we construct an EPU index from -articles from prominent newspapers in the country using relevant keywords and covers the aftermath of the global financial crisis and also includes the COVID pandemic since the current data scope for the index spans January 01, 2010, to November 30, 2022. We evaluate the in-sample and out-of-sample predictability of the constructed EPU index by examining how it connects with economic/financial variables like exchange rates and stock prices in Nigeria. We provide evidence that lends credence to the inclusion of the index, among other predictors, in the predictive models for the relevant variables to produce more accurate out-of-sample forecasts for them. More importantly, the results are robust to alternative model specifications, different data frequencies, and multiple forecast horizons. We hope to extend this exercise to other useful indices such as geopolitical risk, Financial Stress indicators, and monetary policy uncertainty, among others, which are not readily available for Africa including Nigeria.