The Asset-Pricing Implications of Government Economic Policy Uncertainty

Using the news-based measure of Baker et al. [Baker SR, Bloom N, Davis SJ (2013) Measuring economic policy uncertainty. Working paper, Stanford University, Stanford, CA] to capture economic policy uncertainty (EPU) in the United States, we find that EPU positively forecasts log excess market returns...

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Bibliographic Details
Published inManagement science Vol. 61; no. 1; pp. 3 - 18
Main Authors Brogaard, Jonathan, Detzel, Andrew
Format Journal Article
LanguageEnglish
Published Linthicum INFORMS 01.01.2015
Institute for Operations Research and the Management Sciences
Subjects
asset pricing
Economic policy
finance
government policy
Innovations
News
political uncertainty
Portfolio management
Portfolios
Uncertainty
Volatility
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Summary:Using the news-based measure of Baker et al. [Baker SR, Bloom N, Davis SJ (2013) Measuring economic policy uncertainty. Working paper, Stanford University, Stanford, CA] to capture economic policy uncertainty (EPU) in the United States, we find that EPU positively forecasts log excess market returns. An increase of one standard deviation in EPU is associated with a 1.5% increase in forecasted three-month abnormal returns (6.1% annualized). Furthermore, innovations in EPU earn a significant negative risk premium in the Fama–French 25 size–momentum portfolios. Among the Fama–French 25 portfolios formed on size and momentum returns, the portfolio with the greatest EPU beta underperforms the portfolio with the lowest EPU beta by 5.53% per annum, controlling for exposure to the Carhart four factors as well as implied and realized volatility. These findings suggest that EPU is an economically important risk factor for equities. This paper was accepted by Wei Jiang, finance.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
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content type line 14
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2014.2044