Does Economic Policy Uncertainty Matter for Stock Market Volatility?
This study examines the dynamic relationship between economic policy uncertainty (EPU) and stock market volatility in a pure order-driven emerging stock market. Considering the non-linear EPU-volatility relationship, this study uses GARCH family of models
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Does Economic Policy Uncertainty Matter for Stock Market Volatility? Abhisek Mishra and Byomakesh Debata
Abstract This study examines the dynamic relationship between economic policy uncertainty (EPU) and stock market volatility in a pure order-driven emerging stock market. Considering the non-linear EPU-volatility relationship, this study uses GARCH family of models to capture the impact of policy uncertainty on stock market volatility. Empirical estimates reveal that economic policy uncertainty is an essential determinant of stock market volatility, and higher EPU leads to significant increase in volatility. We believe, a thorough understanding the EPU-Volatility relationship can be beneficial for investors to better predict the behaviour of stock market volatility. Keywords Economic policy uncertainty · GARCH models · Stock market volatility JEL Code E44 · G12 · G14
4.1 Introduction Stock market volatility has been a pertinent subject of interest for investors, policymakers, academic researchers and practitioners due to its implications for asset pricing, hedging, risk management, portfolio diversification, predicting future prospects of market and maintaining financial market stability (Paye, 2012; Ropach & Zhou, 2013; Antonakakis, Balcilar, Gupta, & Kyei, 2016). In the post-global financial crisis, the Economic Policy Uncertainity (EPU) has received considerable attention in finance literature. Existing studies have found that EPU has potential negative effects on various economic activities including economic growth, inflation, investment and employment (Rodrik, 1991; Bloom, Bond, & Reenen, 2007; A. Mishra (B) Nabakrushna Choudhury Centre for Development Studies, Bhubaneswar, India e-mail: [email protected] B. Debata Birla Institute of Technology and Science, Pilani Campus, Vidya Vihar, Rajasthan, India © The Author(s), under exclusive license to Springer Nature Switzerland AG 2020 A. K. Mishra et al. (eds.), The Financial Landscape of Emerging Economies, Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application, https://doi.org/10.1007/978-3-030-60008-2_4
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Bloom, 2009; Bhagat, Ghosh, & Ranjan, 2016, Broggard & Detzel, 2015; Gulen & Ion, 2016). Specifically, in the context of stock market, it is evident that rise in EPU leads to increase in stock market volatility and reduce stock returns (Pastor & Veronesi, 2012; Antonakkis, Chatziantoniou, & Filis, 2013; Bhagat et al., 2016; Kang & Ratti, 2013; Wu, Liu, & Hsueh, 2016; Christou et al., 2017). From the ongoing literature, it is inferred that the majority of the studies have been carried out in developed countries and the results are inconclusive. Further, the effect of EPU on stock volatility in the context of emerging economies is scantly investigated. In this conjecture, the present study is carried out to examine the effect of EPU on stock market volatility in an emerging order-driven stock market. We consider the Indian stock market as the ideal candidate for this study due to the followin
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