Spillovers of U.S. market volatility and monetary policy uncertainty to global stock markets

• Published in: The North American journal of economics and finance Vol. 58; p. 101523
• Main Author: Chiang, Thomas C.
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.11.2021
• Subjects: Monetary policy uncertainty; Risk-return relation; Uncertainty premium, equity market uncertainty; Risk-return relation; Uncertainty premium, equity market uncertainty; Monetary policy uncertainty
• ISSN: 1062-9408; 1879-0860
• DOI: 10.1016/j.najef.2021.101523

•Unexpected monetary growth causes a negative effect on stock returns.•High volatility in the U.S. gives rise to a damage effect on global stock prices.•U.S. monetary policy uncertainty has a negative effect on global stock returns.•U.S. monetary policy uncertainty on stock prices is robust across different data. This study investigates the impact of unexpected monetary growth (UΔM) and changes in U.S. monetary policy uncertainty (ΔMPU) on international stock returns while controlling for a change in equity market volatility (ΔEMV) and dividend yield (DY). Testing of North American stock market indices consistently shows that both UΔM and ΔMPU have significant negative impacts on stock returns, which extend the effects to one month lag. Further testing of Europe, Latin America and Asia market indices yields comparable qualitative results. The evidence confirms that an increase in the U.S. MPU is transmitted to international stock markets. This finding supports the international risk/uncertainty premium hypothesis. However, a rise in U.S. unexpected monetary growth as measured by UΔM has a less consistent effect in Latin American and Asian stock markets.