US Economic Policy Uncertainty and GCC Stock Market
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US Economic Policy Uncertainty and GCC Stock Market Abdullah Alqahtani1 · Miguel Martinez2
© Springer Japan KK, part of Springer Nature 2020
Abstract This study contributes to the scant finance literature on emerging countries by examining the relationship between economic policy uncertainty and monthly indices of Gulf Cooperation Council (GCC) stock markets during the period of July 2004 to August 2018. Both U.S. and global economic policy uncertainties exert significant and negative long run influence on stock prices in Bahrain and Kuwait. The impact of U.S. economic policy risk, however, is relatively stronger. Other stock markets in the GCC region, on the other hand, are not affected by U.S. and global economic policy uncertainty. These markets present a sound alternative for international portfolio diversification when the global economic policy uncertainty is on the rise. Keywords Policy uncertainty · Stock price · GCC · ARDL · Breakpoint unit root test JEL Classification C32 · E60 · E66 · G10 · G18
1 Introduction Recently, literature has articulated theoretical and empirical linkages between economic policy uncertainty and financial markets. Overall, it posits that high policy uncertainty may adversely influence the economy by delaying or altering consumption, spending, investment and employment decisions (Gulen and Ion 2016). Stock prices tend to fall following the announcement of a policy change. Economic policy uncertainty leads to higher risk premium and volatility in equity markets, especially when the economy is weak (Pástor and Veronesi 2013). Economic policy uncertainty and firm-specific uncertainty tend to delay investment decisions of firms, as * Abdullah Alqahtani [email protected] Miguel Martinez [email protected] 1
Suffolk University, Boston, USA
2
Columbia University, New York, USA
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firms are uncertain about cost of capital due to possible change in fiscal policies (Kang et al. 2014). Macroeconomic uncertainty leads to a significant decline in production, labour supply, and employment (Jurado et al. 2015). Economic policy uncertainty in the US and Europe are linked with financial markets. Fluctuations in the U.S. economic policy uncertainty index reduce the degree of co-movements between Chinese A/B stock markets and the American stock markets (Li and Peng 2017). Economic policy uncertainty predicts monthly stock excess returns in 10 out of 16 countries (Phan et al. 2018). Volatility in economic policies in the U.S. and the U.K. tend to reduce stock prices in seven OECD countries (Chang et al. 2015). Co-movements between U.S. stock market returns, returns volatility, and economic policy uncertainty vary over time and greater economic policy uncertainty reduces stock market returns (Antonakakis et al. 2013). A positive shock to economic policy uncertainty in China has a lagged adverse impact on global oil production, oil price, and stock market returns in China (Later, Kang and Ratti 2015). Although very limited, the lit
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