The Causal Relationship between Economic Policy Uncertainty and Stock Market Returns

Abstract

Given the substantially increased role of financial markets in the global economy, there is a various empirical evidence regarding how stock prices respond to changes in economic policy uncertainty (EPU). This study contributes to the literature by employing a bootstrap panel Granger causality approach on the relationship between EPU and stock market returns. The results, provide insight into the fact that it may indeed be the stock market that plays the triggering role in the context of emerging markets and for majority of developed markets there is no causal relationship between EPU and stock market returns.