Effect of Uncertainty on U.S. Stock Returns and Volatility: Evidence from Over Eighty Years of High-Frequency Data

In this paper, we analyse the asymmetric impact of financial uncertainty shocks on stock returns and volatility of the U.S. equity market over the period of 18th March, 1936 to 30th November, 2016, by controlling for impact of monetary policy shocks and recessions. We find that positive growth rates of uncertainty reduce stock returns and increases volatility, while, negative growth rates of uncertainty primarily reduce stock market variance. Further, the impact of changes in uncertainty on volatility is found to be asymmetric in the statistical sense. A rolling window estimation over the period of 30th June, 1954 to 30th November, 2016, shows that there is significant time variation in the impact of uncertainty, though the direction of impact largely confirms with the static case. Our study provides new evidence that the impact of financial uncertainty on the U.S. equity markets is intuitively consistent even in the historical and high-frequency context.