Directional Spillover Effects Between BRICS Stock Markets and Economic Policy Uncertainty
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Directional Spillover Effects Between BRICS Stock Markets and Economic Policy Uncertainty Ngo Thai Hung1 Accepted: 15 November 2020 © The Author(s), under exclusive licence to Springer Japan KK part of Springer Nature 2020
Abstract In recent years, researchers have increasingly studied the association between the stock market and economic policy uncertainty (EPU). To have more profound knowledge, this paper investigates the evolution of the mean spillover effects between EPU and BRICS stock markets by employing both the multivariate DECOGARCH model proposed by Engle and Kelly (J Bus Econ Stat 30(2):212–228, 2012) and the spillover index of Diebold and Yilmaz (Int J Forecast 26(1):57–66, 2012). The results uncover that the average return equicorrelation between the BRICS stock indices and EPU is positive. In addition, there is a bidirectional return spillover between EPU and BRICS stock returns in the aftermath of the recent European debt crises and the global financial crisis. Overall, our results reveal the existence of the short term, the pass-through impact of EPU via stock price fluctuation in BRICS countries. These findings might provide significant implications for portfolio managers, investors, and government agencies. Keywords EPU · Stock markets · BRICS · DECO · Spillover index JEL Classification C32 · G10
1 Introduction Fluctuations in asset prices represent a significant challenge for policymakers because the co-movements in the financial markets can not only have important implications for production costs, corporate benefits, and employment growth rate but also result in deviations from macroeconomic policies to enhance the development and social welfare (Liu and Zhang 2015; Yin et al. 2017). In addition, to avoid and forecast the future economic downturn, governments all over the world have dramatically risen their level of intervention (Chen et al. 2019). * Ngo Thai Hung [email protected] 1
Faculty of Economics and Law, University of Finance-Marketing, Ho Chi Minh City, Vietnam
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According to Li et al. (2016), government policymakers play a part in massive economic uncertainty as they are unable to agree or change economic policies frequently. The resulting policy-related economic uncertainty would elicit the stock markets slumping (Jin et al. 2019). To evaluate policy uncertainty, Baker et al. (2016) build economic policy uncertainty (EPU), which has been widely used in theoretical and empirical studies (Luo and Zhang 2020). In the existing literature, a growing number of papers has investigated the role of EPU on financial markets such as Bitcoin (Wang et al. 2019; Demir et al. 2018; Fang et al. 2019; Paule-Vianez et al. 2020), crude oil prices (Antonakakis et al. 2014; Chen et al. 2019,2020a, b; Mei et al. 2019), foreign exchange markets (Al-Yahyaee et al. 2020; Chen et al. 2019; Bartsch 2019). Specifically, the interdependence between EPU and stock markets has been studied using different methodologies by Arouri et al. (2016), Kang and Ratti (2
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