Evidence of economic policy uncertainty and COVID-19 pandemic on global stock returns

• Published in: Journal of risk and financial management Vol. 15; no. 1; pp. 1 - 24
• Main Author: Chiang, Thomas C
• Format: Journal Article
• Language: English
• Published: Basel MDPI 01.01.2022; MDPI AG
• Subjects: Capital assets; Coronaviruses; COVID-19; Econometrics; Economic policy; economic policy uncertainty; equity market volatility; GARCH model; global market; Hypotheses; Infectious diseases; Investments; Investor behavior; Literature reviews; Medical research; Pandemics; Prices; Rates of return; Securities markets; Stochastic models; Stock exchanges; Stock prices; Time series; uncertainty premium; Volatility; Canada; United States > US; China; Japan
• ISSN: 1911-8074; 1911-8066; 1911-8074
• DOI: 10.3390/jrfm15010028

This paper examines the impact of changes in economic policy uncertainty (EPU) and COVID-19 shock on stock returns. Tests of 16 global stock market indices, using monthly data from January 1990 to August 2021, suggest a negative relation between the stock return and a country's EPU. Evidence suggests that a rise in the U.S. EPU causes not only a decline in a country's stock return, but also a negative spillover effect on the global market; however, we cannot find a comparable negative effect from global EPU to U.S. stocks. Evidence suggests that the COVID-19 pandemic has a negative impact that significantly affects stock return worldwide. This study also finds an indirect COVID-19 impact that runs through a change in domestic EPU and, in turn, affects stock return. Evidence shows significant COVID-19 effects that change relative stock returns between the U.S. and global markets, creating a decoupling phenomenon.