Economic Policy Uncertainty and Emerging Stock Market Volatility

• Published in: Asia-Pacific financial markets Vol. 31; no. 1; pp. 165 - 181
• Main Authors: Ghani, Maria, Ghani, Usman
• Format: Journal Article
• Language: English
• Published: Tokyo Springer Japan 01.03.2024; Springer Nature B.V
• Subjects: Autoregressive models; COVID-19; Econometrics; Economic policy; Economic Theory/Quantitative Economics/Mathematical Methods; Economics and Finance; Finance; Forecasting; Impact analysis; International Economics; Macroeconomics/Monetary Economics//Financial Economics; Original Research; Performance evaluation; Predictions; Securities markets; Stock exchanges; Uncertainty; Volatility; Pakistan; United Kingdom > UK; United States > US; China; COVID-19; Stock market volatility; MCS test; Economic policy uncertainty; GARCH-MIDAS model
• ISSN: 1387-2834; 1573-6946
• DOI: 10.1007/s10690-023-09410-1

This research examines the effect of economic policy uncertainty (EPU) indices on Pakistan's stock market volatility. Particularly, we examine the impact of the economic policy uncertainty index for Pakistan and bilateral global trading partner countries, the US, China, and the UK. We employ the GARCH-MIDAS model and combination forecast approach to evaluate the performance of economic uncertainty indices. The empirical findings show that the US economic policy uncertainty index is a more powerful predictor of Pakistan stock market volatility. In addition, the EPU index for the UK also provides valuable information for equity market volatility prediction. Surprisingly, Pakistan and China EPU indices have no significant predictive information for volatility forecasting during the sample period. Lastly, we find evidence of all uncertainty indices during economic upheaval from the COVID-19 pandemic. We obtained identical results even during the Covid-19. Our findings are robust in various evaluation methods, like MCS tests and other forecasting windows.