Economic policy uncertainty spillover effects on sectoral equity returns of New Zealand
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Economic policy uncertainty spillover effects on sectoral equity returns of New Zealand Faruk Balli 1,2 & Hatice O. Balli 1 & Mudassar Hasan 1,3 & Russell Gregory-Allen 1 # Academy of Economics and Finance 2020
Abstract In this paper, we introduce a weekly index of economic policy uncertainty (EPU) for New Zealand and examine the return and volatility spillovers from New Zealand (local) and US (foreign) EPU on aggregate (NZSE) and sectoral indices of New Zealand stock market. The multivariate VAR (1)-BEKKGARCH model is employed for this purpose. Overall, our findings suggest that NZ equity sectors and NZSE receive much stronger and more pronounced spillover effects from US EPU compared to the local counterpart (NZ EPU). While the return spillovers from both EPUs are somewhat similar yet limited to just a few sectors, the effect of US EPU on NZ sectors’ volatility outstrips that of the NZ EPU. Furthermore, while the domestically oriented sectors are relatively more vulnerable to NZ EPU, those having export/import concentration with the US are mainly susceptible to US EPU. These findings may be useful to investors seeking sectoral diversification opportunities across New Zealand and the US. Keywords Spillover models . Economic policy uncertainty . Stock markets JEL Classification G12 . G15 . C32
* Mudassar Hasan [email protected] Faruk Balli [email protected]
1
School of Economics and Finance, Massey University, Albany, Auckland, New Zealand
2
Higher School of Economics and Business, Al-Farabi Kazakh National University, Almaty, Republic of Kazakhstan
3
Lahore Business School, The University of Lahore, Albany, Lahore, Pakistan
Journal of Economics and Finance
1 Introduction Over the past two decades, major economic and political events, such as partisan policy disputes in the US, serial crises in Europe, the 2007–2008 global financial crisis (GFC), and Brexit, have raised serious concerns among investors, financial analysts, and regulators across the world (as noted by Baker et al. 2016). These economic agents are particularly worried about how changes in local and foreign economic policy uncertainty (hereafter EPU) are transmitted to domestic stock markets. A perfect example was the US President Donald Trump’s decision in June 2018 to increase tariffs on imports from Canada, the European Union, and China in particular. The uncertainty generated by this policy decision triggered an immediate response from local investors as well as international market participants. As a result, there has been a tremendous amount of volatility in many financial markets around the world, including China, Japan, Europe, and the US. This example highlights the importance of US EPU and the way it can exert spillover effects on international stock markets. That is the reason why the International Monetary Fund (IMF) has repeatedly warned about the threat of another financial crisis that may arise from the expansionary policies followed by several major economies1 over the recent decade. This crucial issue has attracted m
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