Nexus among Economic Policy Uncertainty, Stock Returns and Macroeconomic Variables- New Evidence from Developing Country’s Stock Market using NARDL Cointegration Approach
DOI:
https://doi.org/10.22555/pbr.v25i1.878Keywords:
Economic policy uncertainty, stock returns, macroeconomics variables, asymmetric co-integrationAbstract
Uncertainty generates hype which creates difficulty to predict the returns in the stock market. To answer this phenomenon this study is carried out which aims to investigate the nexus of Economic Policy Uncertainty with Stock Return having macroeconomic variables as controlled in Pakistan over the period of 2010 to 2022. A novel technique non-linear ARDL (NARDL) co-integration statistical approach to estimate and explore the asymmetric effect has been employed. The findings of this study show that there is significant long-term co-integration exists between shifts in Economic Policy Uncertainty with stock returns in Pakistan. We also found the short-run and long-run shocks (Positive and Negative) of EPU have a significant effect on the stock return along with the exchange rate and consumer price index. This means high uncertainty in economic policy can decrease the stock returns and low uncertainty (means high certainty) can increase the stock returns in Pakistan. More interestingly, we found an asymmetrical relationship between SEPU with stock returns which means no symmetry or no linearity in the relationship. Concisely, inflows from positive EPU shocks have a long-term negative impact on stock returns and negative EPU inflows shocks have a long-term positive impact on stock returns in Pakistan. To overcome political instability, stock market declines, rising of inflation, and currency devaluation this study can be useful for policymakers, the Government, regulatory authorities, investors, the equity market, and so forth .
References
Abdalla, I. S., & Murinde, V. (2017). Exchange rate and stock price interactions in emerging financial markets: evidence on India, Korea, Pakistan and the Philippines. Applied financial economics, 7(1), 25-35.
Arouri, M., Estay, C., Rault, C., Roubaud, D. (2016) Economic policy uncertainty and stock markets: Long-run evidence from the US. Finance Research Letters 2016, 18, 136-141.
Bahmani-Oskooee M, & Saha S. (2019a) On the effects of policy uncertainty on stock prices. J Econ Financ 43, 764–778.
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty.The Quarterly Journal of Economics, 131(4), 1593-1636.
Baker, S.E., Edwards R., & Doidge, M., (2012) How Many Qualitative Interviews Is Enough? Expert Voices and Early Career Reflections on Sampling and Cases in Qualitative Research. Working Paper.http://eprints.brighton.ac.uk/11632/.
Barrero JM., Bloom N., Wright I., (2017) Short and long-run uncertainty (No. w23676). National Bureau of Economic Research.
Bekaert G, & Hoerova M (2016) What do asset prices have to say about risk appetite and uncertainty? Journal of Bank Finance, 67, 103–118.
Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The Quarterly Journal of Economics, 98(1),85-106.
Brown, R. L., Durbin, J., & Evans, J. M. (1975). Techniques for testing the constancy of regression relationships over time. Journal of the Royal Statistical Society: Series B (Methodological), 37(2), 149-163.
Brogaard, J., & Detzel, A. (2015). The asset-pricing implications of government economic policy uncertainty. Management science, 61(1), 3-18.
Chen CYH, Chiang TC, Hardle WK (2018) Downside risk and stock returns in the G7 countries An empirical analysis of their long-run and short-run dynamics. Journal of Banking & Finance,93, 21–32
Chiang T.C. (2019). Economic policy uncertainty, risk and stock returns: Evidence from G7 stock markets. Finance Research Letters, 29, 41–49.
Chiang, T. C. (2020). Economic policy uncertainty and stock returns-evidence from the Japanese market. Quantitative Finance and Economics, 4(3), 430-458.
Christou, C., Cunado, J., Gupta, R., & Hassapis, C (2017) Economic policy uncertainty and stock market returns in Pacific-Rim countries: Evidence based on a Bayesian panel VAR model.Journal of Multinational Financial Management 40, 92–102.
Choudhary M. A., Pasha F., &Waheed M., (2020), Measuring Economic Policy Uncertainty in Pakistan, MPRA Working Paper No. 100013.
Granger, C. W., Huangb, B. N., & Yang, C. W. (2000). A bivariate causality between stock prices and exchange rates evidence from recent Asianflu The Quarterly Review of Economics and Finance, 40(3), 337-354.
Gulko, L. (2002). "Decoupling: If the U.S. Treasury Repays Its Debt, What Then?" Journal of portfolio management 28(3),59-66.
Handley K., & Limao N., (2015) Trade and investment under policy uncertainty: theory and firm evidence. American Economic Journal: Economic Policy 7(4),189–222.
Hu, Zhinning. (2022). Six types of government policies and housing prices in China. Economic Modelling, 108, 105764.
Katsoulacos, Y., Avdasheva, S., & Benetatou, K. (2020). The role of economics: testing for the extent of effects-based enforcement and its relation to judicial review in different countries. Empirical_analysis of LSs in different ountries260420 33.
Kirange, D. K., & Deshmukh, R. R. (2016). Sentiment Analysis of news headlines for stock price prediction. Composoft, An International Journal of Advanced Computer Technology, 5(3), 2080-2084.
Kundu, S., & Paul, A. (2022). Effect of economic policy uncertainty on stock market return and volatility under heterogeneous market characteristics. International review of economics & finance, 80, 597-612.
Menzly L, Santos T, Veronesi P (2004) Understanding predictability. J Political Economy 112(1),1–47.
Mensi, W., Hammoudeh, S., Shahzad, S. J. H., & Shahbaz, M. (2017). Modeling systemic risk and dependence structure between oil and stock markets using a variational mode e composition-based copula method. Journal of Banking & Finance, 75, 258-279.
Mezrich, J., & Isikawa, Y. (2013). The uncertainty that matters, the drag on the market. Instinet, Quantitative Desk Strategies.
Mbanyele, W. (2023). Economic policy uncertainty and stock liquidity: the role of board networksin an emerging market. International Journal of Emerging Markets, 18(1), 122-147.
Ongan, S., & Gocer, I. (2017). The Relationships between Home Prices, Financial Literacy and Economic Policy Uncertainty: Empirical Evidence from the US Housing Market. Journal of Applied Economics & Business Research, 7(4), 232-242.
Peng, L., & Xiong, W. (2006). Investor attention, overconfidence and category learning. Journal of Financial Economics, 80(3), 563-602.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics, 16(3), 289-326.
Sengupta, P., & Puri, R. (2020). Exploration of Relationship between FDI and GDP: A Comparison between India and Its Neighboring Countries. Global Business Review 21(2), 473-489.
Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. Festschrift in honor of Peter Schmidt: Econometric methods and applications, 281-314.
Sum, V. (2012). How do stock markets in China and Japan respond to economic policy uncertainty in the United States? Available at SSRN 2092346.
Wisniewski, T. P., & Lambe, B. J. (2015). Does economic policy uncertainty drive CDS spreads? International Review of Financial Analysis, 42, 447-458.
Yaya, O. S., Abu, N., & Ogundunmade, T. P. (2021). Economic policy uncertainty in G7 countries: evidence of long-range dependence and cointegration. Economic Change and Restructuring, 54, 541-556.
Zhang, S., Yao, L., Sun, A., & Tay, Y. (2019). Deep learning-based recommender system: A survey and new perspectives. ACM computing surveys (CSUR), 52(1),
Additional Files
Published
Issue
Section
License
Copyright (c) 2023 Ghulam Mustafa Shaikh, Muhammad Masihullah Jatoi, Raheem Bux Soomro
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
