US policy uncertainty and stock returns: evidence in the US and its spillovers to the European Union, China and Japan

What is it about?

This study examines changes in U.S. categorical policy uncertainty on stock returns controlling for implied volatility and downside risk. Evidence from the U.S., Euro zone, China and Japan shows that changes in uncertainties for U.S. fiscal, monetary and trade policies have significant negative impacts on stock returns. The policy uncertainty effects not only present in the U.S. market, but also spillover to the Euro zone, China and Japan for both aggregate and sectoral price indices. The evidence consistently shows that stock returns present an inverse relation to changes in policy uncertainty, regardless of whether uncertainty is moving upward or downward.

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