Policy uncertainty in financial markets, an international study analysis

Details

Supervisors

Iania, Leonardo

Faculty

Louvain School of Management

Degree label

Master [120] : ingénieur de gestion, à finalité spécialisée

Abstract

This study investigates the impact of Economic Policy Uncertainty (EPU) on stock and bond returns, and their correlations across 22 international markets from 2000 to 2023. Using the EPU index by Baker et al. (2016), along with additional macroeconomic variables, we employ multivariate OLS regression models to assess these effects. The findings reveal significant variations in market sensitivity to EPU across different countries. Developed markets show a pronounced negative impact of EPU on stock returns and a positive impact on bond returns, reflecting a flight-to-quality behavior. Conversely, emerging markets exhibit varied and often muted responses due to local economic conditions and market maturity. Stock-bond return correlations are negatively affected by rising EPU in developed markets, indicating a shift towards safer assets during periods of high uncertainty. In contrast, emerging markets display a positive correlation, suggesting simultaneous impacts on both asset classes. The study also notes the mitigating effect of government interventions in markets like China. This research contributes to the literature by providing a global analysis of EPU's impact on financial markets, emphasizing the importance of market-specific characteristics and government policies. The findings offer valuable insights for investors, financial managers, and policymakers to develop more resilient investment strategies and policy frameworks amid economic uncertainty.