Research article

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

  • 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.

    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

    Related Papers:

  • 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.


    加载中


    [1] Antonakakis N, Chatziantoniou I, Filis G (2013) Dynamic co-movements of stock market returns, implied volatility and policy uncertainty. Econ Lett 120: 87-92. doi: 10.1016/j.econlet.2013.04.004
    [2] Aono K, Iwaisako T (2010) On the Predictability of Japanese stock returns using dividend yield. Asia-Pac Financ Mark 17: 141-149. doi: 10.1007/s10690-009-9105-5
    [3] Arbatli EC, Davis SJ, Ito A, et al. (2017) Policy uncertainty in Japan. IMF Working Papers 17/128, International Monetary Fund.
    [4] Arouri M, Estay C, Rault C, et al. (2016) Economic policy uncertainty and stock markets: Long run evidence from the US. Financ Res Lett 18: 136-141. doi: 10.1016/j.frl.2016.04.011
    [5] Bahmani-Oskooee M, Saha S (2019a) On the effects of policy uncertainty on stock prices. J Econ Financ 43: 764-778.
    [6] Bahmani-Oskooee M, Saha S (2019b) On the effects of policy uncertainty on stock prices: An asymmetric analysis. Quant Financ Econ 3: 412-424.
    [7] Bae K, Karolyi G, Stulz R (2003). A New Approach to Measuring Financial Contagion. Rev Financ Stud 16: 717-763. doi: 10.1093/rfs/hhg012
    [8] Baker SR, Bloom N, Davis S (2016) Measuring economic policy uncertainty. Q J Econ 131: 1593-1636. doi: 10.1093/qje/qjw024
    [9] Bali TG, Brown SJ, Tang Y (2017) Is economic uncertainty priced in the cross-section of stock returns? J Financ Econ 126: 471-489. doi: 10.1016/j.jfineco.2017.09.005
    [10] Bali TG, Cakici N (2010) World market risk, country-specific risk and expected returns in international stock markets. J Bank Financ 34: 1152-1165. doi: 10.1016/j.jbankfin.2009.11.012
    [11] Bali TG, Demirtas KO, Levy H (2009) Is there an intertemporal relation between downside risk and expected returns? J Financ Quant Anal 44: 883-909. doi: 10.1017/S0022109009990159
    [12] Bali TG, Engle RF (2010) The intertemporal capital asset pricing model with dynamic conditional correlations. J Monetary Econ 57: 377-390. doi: 10.1016/j.jmoneco.2010.03.002
    [13] Bali TG, Peng L (2006) Is there a risk-return tradeoff? Evidence from high frequency data. J Appl Econometrics 21: 1169-1198.
    [14] Balli F, Uddin GS, Mudassar H, et al. (2017) Cross-country determinants of economic policy uncertainty spillovers. Econ Lett 156: 179-183. doi: 10.1016/j.econlet.2017.05.016
    [15] Bekaert G, Harvey CR (1995) Time-varying world market integration. J Financ 50: 403-444. doi: 10.1111/j.1540-6261.1995.tb04790.x
    [16] Bekaert G, Hoerova M (2016) What do asset prices have to say about risk appetite and uncertainty? J Bank Financ 67: 103-118. doi: 10.1016/j.jbankfin.2015.06.015
    [17] Bloom N (2009) The impact of uncertainty shocks. Econometrica 77: 623-685. doi: 10.3982/ECTA6248
    [18] Bloom N (2014) Fluctuations in uncertainty. J Econ Perspect 28: 153-176. doi: 10.1257/jep.28.2.153
    [19] Bollerslev T (2010) Glossary to ARCH (GARCH), in Volatility and Time Series Econometrics: Essays in Honor of Robert Engle, edited by Tim Bollerslev, Jeffrey Russell, and Mark Watson, Oxford University Press, Oxford, UK.
    [20] Bollerslev T, Chou RY, Kroner KF (1992) ARCH modeling in finance: a review of the theory and empirical evidence. J Econometrics 52: 5-59. doi: 10.1016/0304-4076(92)90064-X
    [21] Brogaard J, Detzel A (2015) The asset pricing implications of government economic policy uncertainty. Manage Sci 61: 3-18. doi: 10.1287/mnsc.2014.2044
    [22] Caggiano G, Castelnuovo E, Groshenny N (2014) Uncertainty shocks and unemployment dynamics in U.S. recessions. J Monetary Econ 67: 78-92. doi: 10.1016/j.jmoneco.2014.07.006
    [23] Campbell JY, Hamao Y (1992) Predictable stock returns in the United States and Japan: A study of long‐term capital market integration. J Financ 47: 43-69. doi: 10.1111/j.1540-6261.1992.tb03978.x
    [24] Campbell JY, Lo AW, MacKinlay AC (1997) The Econometrics of Financial Markets, Princeton, NJ: Princeton University Press, 1997.
    [25] Carleton RN, Norton MA, Asmundson GJ (2007) Fearing the unknown: a short version of the intolerance of uncertainty scale. J Anxiety Disord 21: 105-117. doi: 10.1016/j.janxdis.2006.03.014
    [26] Chen CWS, Chiang TC, So MKP (2003) Asymmetrical reaction to US stock-return news: Evidence from major stock markets based on a double-threshold model. J Econ Bus 55: 487-502. doi: 10.1016/S0148-6195(03)00051-1
    [27] Chen CYH, Chiang TC (2016) Empirical analysis of the intertemporal relation between downside risk and expected returns: Evidence from time-varying transition probability models. Eur Financ Manage 22: 749-796. doi: 10.1111/eufm.12079
    [28] Chen CYH, Chiang TC, Härdle WK (2018) Downside risk and stock returns in the G7 countries: An empirical analysis of their long-run and short-run dynamics. J Bank Financ 93: 21-32. doi: 10.1016/j.jbankfin.2018.05.012
    [29] Chen J, Jiang F, Tong G (2017) Economic policy uncertainty in China and stock market expected returns. Account Financ 57: 1265-1286. doi: 10.1111/acfi.12338
    [30] Chiang TC (2019a) Economic policy uncertainty, risk and stock returns: Evidence from G7 stock markets. Financ Res Lett 29: 41-49.
    [31] Chiang TC (2019b) Financial risk, uncertainty and expected returns: evidence from Chinese equity markets. China Financ Rev Int 9: 425-454.
    [32] Chiang TC, Li H, Zheng D (2015) The Intertemporal Return-Risk Relationship: Evidence from international Markets. J Int Financ Mark Inst Money 39: 156-180. doi: 10.1016/j.intfin.2015.06.003
    [33] Chiang TC, Jeon BN, Li H (2007) Dynamic correlation analysis of financial contagion: Evidence from Asian markets. J Int Money Financ 26: 1206-1228. doi: 10.1016/j.jimonfin.2007.06.005
    [34] Chong TTL, Wong YC, Yan IKM (2008) Linkages of the Japanese stock market. Japan World Economy 20: 601-662. doi: 10.1016/j.japwor.2007.06.004
    [35] Christou C, Cunado J, Gupta R, et al. (2017) Economic policy uncertainty and stock market returns in Pacific-Rim countries: Evidence based on a Bayesian panel VAR model. J Multinal Financ Manage 40: 92-102. doi: 10.1016/j.mulfin.2017.03.001
    [36] Connolly R, Stivers C, Sun L (2005) Stock market uncertainty and the stock-bond return relation. J Financ Quant Anal 40: 161-194. doi: 10.1017/S0022109000001782
    [37] Cornell B (1983) The money supply announcements puzzle: Review and interpretation. Am Econ Rev 73: 644-657.
    [38] Connolly RA, Wang FA (1999) Economic news and stock market linkages: Evidence from the U.S., U.K., and Japan. Proceedings of the Second Joint Central Bank Research Conference on Risk Management and Systemic Risk. Available from: https://www.imes.boj.or.jp/cbrc/cbrc-11.pdf.
    [39] Cornish EA, Fisher RA (1937) Moments and cumulants in the specification of distribution. Rev Int Stat Institute 5: 307-320. doi: 10.2307/1400905
    [40] Davis S (2016) An index of global economic policy uncertainty. NBER Working Paper 22740. Available from: http://faculty.chicagobooth.edu/steven.davis/pdf/GlobalEconomic.pdf.
    [41] Demir E, Gozgor G, Lau CKM, et al. (2018) Does economic policy uncertainty predict the Bitcoin returns? An empirical investigation. Financ Res Lett 26: 145-149. doi: 10.1016/j.frl.2018.01.005
    [42] Diebold FX, Yilmaz K (2009) Measuring financial asset return and volatility spillovers, with application to global equity markets. Econ J 119: 158-171. doi: 10.1111/j.1468-0297.2008.02208.x
    [43] Dugas MJ, Ladouceur R (2000) Treatment of Gad: Targeting Intolerance of Uncertainty in Two Types of Worry. Behav Modif 24: 635-657. doi: 10.1177/0145445500245002
    [44] Edwards S (1982) Exchange rates and 'news': A multi-currency approach. J Int Money Financ 1: 211-224. doi: 10.1016/0261-5606(82)90016-X
    [45] Engle RF (2009) Anticipating correlations: A new paradigm for risk management, Princeton: Princeton University Press.
    [46] Engle RF, Granger CWJ (1987) Co-integration and error correction: Representation, estimation, and testing. Econometrica 55: 251-276. doi: 10.2307/1913236
    [47] Fernandez-Villaverde J, Guerron-Quintana P, Kuester K, et al. (2015) Fiscal volatility shocks and economic activity. Am Econ Rev 105: 3352-3384. doi: 10.1257/aer.20121236
    [48] Forbes K, Kristin F (2012) The "Big C": Identifying and mitigating contagion. Federal Reserve Bank of Kansas City. Proc-Econ Policy Symposium-Jackson Hole, 23-87.
    [49] French K, Schwert W, Stambaugh R (1987) Expected stock returns and volatility. J Financ Econ 19: 3-29. doi: 10.1016/0304-405X(87)90026-2
    [50] Ghysels E, Santa-Clara R, Valkanov R (2005) There is a risk-return tradeoff after all. J Financ Econ 76: 509-548. doi: 10.1016/j.jfineco.2004.03.008
    [51] Glosten L, Jagannathan R, Runkle D (1993) On the relation between the expected value and volatility of the nominal excess return on stocks. J Financ 48: 1779-1801. doi: 10.1111/j.1540-6261.1993.tb05128.x
    [52] Gu M, Sun M, Wu Y, et al. (2018) Economic policy uncertainty and momentum, presented at the 26th Annual Conference on Pacific Basin Finance, Economics, Accounting, and Management Conference, September 6-7, 2018, Rutgers University, USA.
    [53] Guo H, Whitelaw R (2006) Uncovering the risk-return relation in the stock market. J Financ 61: 1433-1463. doi: 10.1111/j.1540-6261.2006.00877.x
    [54] Hamao Y (2018) Japanese financial market research: A survey. Asia-Pac J Financ Stud 47: 361-380. doi: 10.1111/ajfs.12214
    [55] Hamao Y, Masulis RW, Ng V (1990) Correlations in price changes and volatility across international stock markets. Rev Financ Stud 3: 281-307. doi: 10.1093/rfs/3.2.281
    [56] Hakkio CS, Keeton WR (2009) Financial stress: What is it, how can it be measured, and why does it matter? Econ Rev 94: 5-50.
    [57] Hansen LP, Sargent TJ, Tallarini TD (1999) Robust permanent income and pricing. Rev Econ Stud 66: 873- 907. doi: 10.1111/1467-937X.00112
    [58] Harvey CR, Liechty JC, Liechty MW, et al. (2010) Portfolio selection with higher moments. Quant Financ 10: 469-485. doi: 10.1080/14697681003756877
    [59] Hillen MA, Gutheil CM, Strout TD, et al. (2017) Tolerance of uncertainty: Conceptual analysis, integrative model, and implications for healthcare. Social Sci Med 180: 62-75. doi: 10.1016/j.socscimed.2017.03.024
    [60] Izadi S, Hassan MK (2018) Portfolio and hedging effectiveness of financial assets of the G7 countries. Eurasian Econ Rev 8: 183-213. doi: 10.1007/s40822-017-0090-0
    [61] Johannsen BK (2014) When are the Effects of Fiscal Policy Uncertainty Large? Finance and Economics Discussion Series 2014-40, Board of Governors of the Federal Reserve System, US.
    [62] Karolyi GA, Stulz RM (1996) Why do markets move together? An investigation of US-Japanese stock return comovements. J Financ 51: 951-986.
    [63] Kirange DK, Deshmukh RR (2016) Sentiment Analysis of news headlines for stock price prediction. Available from: https://www.researchgate.net/publication/299536363_Sentiment_Analysis_of_
    [64] News_Headlines_for_Stock_Price_Prediction.
    [65] 64. Kennedy P (2008) A Guide to Econometrics, 6th ed., Oxford, U.K., Blackwell Publishing.
    [66] 65. Klößner S, Sekkel R (2014) International spillovers of policy uncertainty. Econ Lett 124: 508-512. doi: 10.1016/j.econlet.2014.07.015
    [67] 66. Knight F (1921) Risk, Uncertainty, and Profit, 5th ed., New York, Dover Publications.
    [68] 67. Koutmos G (2014) Positive feedback trading: A review. Rev Behav Financ 6: 155-162. doi: 10.1108/RBF-08-2014-0043
    [69] 68. Lettau M, Ludvigson SC (2010) Measuring and modeling variation in the risk-return trade-off, In: Aït-Sahalia, Y., Hansen, L., Scheinkman, J.A (Eds.), Handbook of Financial Econometrics, North Holland, Amsterdam.
    [70] 69. Li Q, Yang J, Hsiao C, et al. (2005) The relationship between stock returns and volatility in international stock markets. J Empir Financ 12: 650-665. doi: 10.1016/j.jempfin.2005.03.001
    [71] 70. Li X (2017) New evidence on economic policy uncertainty and equity premium. Pacific-Basin Financ J 46: 41-56. doi: 10.1016/j.pacfin.2017.08.005
    [72] 71. Li X, Balcilar M, Gupta R, et al. (2015) The causal relationship between economic policy uncertainty and stock returns in China and India: evidence from a bootstrap rolling-window approach. Emerg Mark Financ Trade 52: 674-689. doi: 10.1080/1540496X.2014.998564
    [73] 72. Li Z, Zhong J (2019) Impact of economic policy uncertainty shocks on China's financial conditions. Financ Res Lett.
    [74] 73. Liu L, Zhang T (2015) Economic policy uncertainty and stock market volatility. Financ Res Lett 15: 99-105. doi: 10.1016/j.frl.2015.08.009
    [75] 74. Menzly L, Santos T, Veronesi P (2004) Understanding predictability. J Political Economy 112: 1-47. doi: 10.1086/379934
    [76] 75. Merton RC (1980) On estimating the expected return on the market: An exploratory investigation. J Financ Econ 8: 323-361. doi: 10.1016/0304-405X(80)90007-0
    [77] 76. Mishkin FS (1982) Monetary policy and short‐term interest Rates: An efficient markets‐rational expectations approach. J Financ 37: 63-72.
    [78] 77. Nelson D (1991) Conditional heteroskedasticity in asset returns: A new approach. Econometrica 59: 347-370. doi: 10.2307/2938260
    [79] 78. Newey W, West KD (1987) A simple, positive definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55: 703-708. doi: 10.2307/1913610
    [80] 79. Ozoguz A (2009) Good times or bad times? Investors' uncertainty and stock returns. Rev Financ Stud 22: 4377-4422. doi: 10.1093/rfs/hhn097
    [81] 80. Pastor L, Veronesi P (2013) Political uncertainty and risk premia. J Financ Econ 110: 520-545. doi: 10.1016/j.jfineco.2013.08.007
    [82] 81. Pearce DK, Roley VV (1983) The reaction of stock prices to unanticipated changes in money: A note. J Financ 38: 1323-1333. doi: 10.1111/j.1540-6261.1983.tb02303.x
    [83] 82. Peng L, Xiong W (2006) Investor attention, overconfidence and category learning. J Financ Econ 80: 563-602. doi: 10.1016/j.jfineco.2005.05.003
    [84] 83. Phan DHB, Sharma SS, Tran VT (2018) Can economic policy uncertainty predict stock returns? Global evidence. J Int Financ Mark Inst Money 55: 134-150. doi: 10.1016/j.intfin.2018.04.004
    [85] 84. Rapach DE, Strauss JK, Zhou G (2013) International stock return predictability: What is the role of the United States? J Financ 68: 1633-1622. doi: 10.1111/jofi.12041
    [86] 85. Roy AD (1952) Safety first and the holding of assets. Econometrica 20: 431-449. doi: 10.2307/1907413
    [87] 86. Scruggs JF (1998) Resolving the puzzling intertemporal relation between the market risk premium and conditional market variance: A two-factor approach. J Financ 53: 575-603. doi: 10.1111/0022-1082.235793
    [88] 87. Sum V (2012) How do stock markets in China and Japan respond to economic policy uncertainty in the United States? Available from: https://ssrn.com/abstract=2092346.
    [89] 88. Tetlock P, Saar-Tsechansky M, Macskassy S (2008) More than words: quantifying language to measure firms' fundamentals. J Financ 63: 1437-1467. doi: 10.1111/j.1540-6261.2008.01362.x
    [90] 89. Trung NB (2019) The spillover effect of the US uncertainty on emerging economies: A Panel VAR Approach. Appl Econ Lett 26: 210-216. doi: 10.1080/13504851.2018.1458183
    [91] 90. Tsai IC (2017) The source of global stock market risk: A viewpoint of economic policy uncertainty. Econ Model 60: 122-131. doi: 10.1016/j.econmod.2016.09.002
    [92] 91. Wang GJ, Xie C, Wen D, et al. (2019) When Bitcoin meets economic policy uncertainty (EPU): Measuring risk spillover effect from EPU to Bitcoin. Financ Res Lett 31(C).
    [93] 92. Whaley RE (2009) Understanding the VIX. J Portf Manage 35: 98-105. doi: 10.3905/JPM.2009.35.3.098
    [94] 93. Zhang Y (2018) China, Japan and the US stock markets and global financial crisis. Asia-Pac Financ Mark 25 23-45. doi: 10.1007/s10690-018-9237-6
  • QFE-04-03-020-s001.pdf
  • Reader Comments
  • © 2020 the Author(s), licensee AIMS Press. This is an open access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0)
通讯作者: 陈斌, bchen63@163.com
  • 1. 

    沈阳化工大学材料科学与工程学院 沈阳 110142

  1. 本站搜索
  2. 百度学术搜索
  3. 万方数据库搜索
  4. CNKI搜索

Metrics

Article views(5354) PDF downloads(671) Cited by(19)

Article outline

Figures and Tables

Figures(2)  /  Tables(8)

Other Articles By Authors

/

DownLoad:  Full-Size Img  PowerPoint
Return
Return

Catalog