Economic policy uncertainty and stock returns—evidence from the Japanese market

Thomas C. Chiang; Thomas C. Chiang

doi:10.3934/QFE.2020020

Quantitative Finance and Economics

2020, Volume 4, Issue 3: 430-458. doi: 10.3934/QFE.2020020

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Research article

Economic policy uncertainty and stock returns—evidence from the Japanese market

Thomas C. Chiang ^,

Department of Finance, Drexel University, 11 floor, LeBow Hall, 3220 Market Street, Philadelphia, PA 19104, USA

Received: 07 April 2020 Accepted: 15 June 2020 Published: 18 June 2020
JEL Codes: G11, G12, G15

This study examines the impact of changes in economic policy uncertainty (?EPU) on the Japanese (excess) stock return. Evidence of a negative?EPU coefficient implies that heightened economic policy uncertainty (EPU) will cause a decline in stock returns; however, a positive effect in the lagged coefficient of EPU suggests an increase in stock returns. This phenomenon also displays with a rise in uncertainties for fiscal policy, monetary policy, trade policy, global EPU or total uncertainty in Japanese market. Testing of asymmetrical impacts for an upward or downward shift in uncertainty indicates the presence of inverse relations between uncertainty changes and stock returns. Yet, the degree of asymmetry of uncertainty changes on stock returns is more significant from the Japanese own market as compared with U.S. influence.
- downside risk,
- economic policy uncertainty,
- fiscal policy uncertainty,
- monetary policy uncertainty,
- Japanese market
Citation: Thomas C. Chiang. Economic policy uncertainty and stock returns—evidence from the Japanese market[J]. Quantitative Finance and Economics, 2020, 4(3): 430-458. doi: 10.3934/QFE.2020020

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Abstract

This study examines the impact of changes in economic policy uncertainty (?EPU) on the Japanese (excess) stock return. Evidence of a negative?EPU coefficient implies that heightened economic policy uncertainty (EPU) will cause a decline in stock returns; however, a positive effect in the lagged coefficient of EPU suggests an increase in stock returns. This phenomenon also displays with a rise in uncertainties for fiscal policy, monetary policy, trade policy, global EPU or total uncertainty in Japanese market. Testing of asymmetrical impacts for an upward or downward shift in uncertainty indicates the presence of inverse relations between uncertainty changes and stock returns. Yet, the degree of asymmetry of uncertainty changes on stock returns is more significant from the Japanese own market as compared with U.S. influence.

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