Does policy uncertainty affect equity, commodity, interest rates, and currency markets? Evidence from CBOE’s volatility index
Abstract
Economic policy drives investment, production, employment, and other macroeconomic indicators of the economy. The study examines the equity, commodity, interest rates, and currency markets, taking into consideration the US economic policy uncertainty (EPU) index. The present work determines the association among policy uncertainty and volatility index, expressed in terms of generalized autoregressive conditional heteroscedasticity and period of empirical work spanning from 2000 to 2018. The results suggest that equity markets’ volatility tends to be very high based on a high degree of policy uncertainty. The findings on the commodity market indicate that crude oil and gold prices remain more volatile during the presidential election and financial crisis. One of the essential results shows that the 2000s boom, early credit crunch, Lehman’s collapse and recession, and fiscal policy battles have significantly affected the equity, currency, and commodity markets. The interest rates and currency markets have responded considerably to Feds’ and EPU index. The empirical outcome provides evidence that implied volatility index is a forward looking expectation of future stock market volatility, and it uncovers that policy uncertainty affects investor sentiment. The present work holds some practical implications for the government to formulate policies to regulate the US market.
Keyword : policy uncertainty, equity, commodity, interest rate, foreign exchange, VIX
How to Cite
Shaikh, I. (2020). Does policy uncertainty affect equity, commodity, interest rates, and currency markets? Evidence from CBOE’s volatility index. Journal of Business Economics and Management, 21(5), 1350-1374. https://doi.org/10.3846/jbem.2020.13164
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
Alola, A. A., & Uzune, G. (2020). The housing market and agricultural land dynamics: Appraising with economic policy uncertainty index. International Journal of Finance & Economics, 25(2), 274–285. https://doi.org/10.1002/ijfe.1751
Ashraf, B. N., & Shen, Y. (2019). Economic policy uncertainty and banks’ loan pricing. Journal of Financial Stability, 44, 100695. https://doi.org/10.1016/j.jfs.2019.100695
Badshah, I., Demirer, R., & Suleman, M. T. (2019). he effect of economic policy uncertainty on stockcommodity correlations and its implications on optimal hedging. Energy Economics, 84, 104553. https://doi.org/10.1016/j.eneco.2019.104553
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
Baker, S. R., Bloom, N., Davis, S. J., & Kost, K. (2019, March 25). Policy news and stock market volatility. http://www.policyuncertainty.com/media/Policy%20News%20and%20Stock%20Market%20Volatility.pdf
Bali, T. G., Brown, S. J., & Tang, Y. (2017). Is economic uncertainty priced in the cross-section of stock returns? Journal of Financial Economics, 126(3), 471–489. https://doi.org/10.1016/j.jfineco.2017.09.005
Chen, E.-T. J., & Clements, A. (2007). S&P 500 implied volatility and monetary policy announcements. Finance Research Letters, 4(4), 227–232. https://doi.org/10.1016/j.frl.2007.07.002
Christensen, B., & Prabhala, N. (1998). The relation between implied and realized volatility. Journal of Financial Economics, 50(2), 125–150. https://doi.org/10.1016/S0304-405X(98)00034-8
Christou, C., Cunado, J., Gupta, R., & Hassapis, C. (2017). Economic policy uncertainty and stock market returns in PacificRim countries: Evidence based on a Bayesian panel VAR model. Journal of Multinational Financial Management, 40, 92–102. https://doi.org/10.1016/j.mulfin.2017.03.001
Degiannakis, S., & Filis, G. (2019). Forecasting European economic policy uncertainty. Scottish Journal of Political Economy, 66(1), 94–114. https://doi.org/10.1111/sjpe.12174
Demir, E., Gozgor, G., Lau, C. K., & Vigne, S. A. (2018). Does economic policy uncertainty predict the Bitcoin returns? An empirical investigation. Finance Research Letters, 26, 145–149. https://doi.org/10.1016/j.frl.2018.01.005
Duan, Y., Chen, W., Zeng, Q., & Liu, Z. (2018). Leverage effect, economic policy uncertainty and realized volatility with regime switching. Physica A: Statistical Mechanics and its Applications, 493, 148–154. https://doi.org/10.1016/j.physa.2017.10.040
Engle, R. (2001). The use of ARCH/GARCH models in applied econometrics. Journal of Economic Perspectives, 15(4), 157–168. https://doi.org/10.1257/jep.15.4.157
Farka, M., & Fleissig, A. R. (2012). The effect of FOMC statements on asset prices. International Review of Applied Economics, 26(3), 387–416. https://doi.org/10.1080/02692171.2011.587111
Federal Open Market Committee. (2009, December 16). Minutes of the December 2009 Meeting. http://www.federalreserve.gov/monetarypolicy/fomcminutes20091216.htm
Gábor, E., & Georgarakos, D. (2018). Economic policy uncertainty and stock market participation. (CFS Working Paper No. 590). https://doi.org/10.2139/ssrn.3139007
Ghirelli, C., Pérez, J. J., & Urtasun, A. (2019). A new economic policy uncertainty index for Spain. Economics Letters, 182, 64–67. https://doi.org/10.1016/j.econlet.2019.05.021
Graham, M., Nikkinen, J., & Sahlström, P. (2003). Relative importance of scheduled macroeconomic news for stock market investors. Journal of Economics and Finance, 27(2), 153–165. https://doi.org/10.1007/BF02827216
Hu, Z., Kutan, A. M., & Sun, P.-W. (2018). Is US economic policy uncertainty priced in China’s A-shares market? Evidence from market, industry, and individual stocks. International Review of Financial Analysis, 57, 207–220. https://doi.org/10.1016/j.irfa.2018.03.015
Huang, Y., & Luk, P. (2020). Measuring economic policy uncertainty in China. China Economic Review, 59, 101367. https://doi.org/10.1016/j.chieco.2019.101367
Husted, L., Rogers, J., & Sun, B. (2019). Monetary policy uncertainty. Journal of Monetary Economics (in Press). https://doi.org/10.1016/j.jmoneco.2019.07.009
International Monetary Fund. (2012, October). World Economic Outlook: Coping with High Debt and Sluggish Growth. IMF Press.
Knapkova, M., Kiaba, M., & Hudec, S. (2019). Impact of macroeconomic indicators on public debt of Slovak Republic. Journal of Business Economics and Management, 20(4), 734–753. https://doi.org/10.3846/jbem.2019.10184
Nana, G.-A. N., Korn, R., & Erlwein-Saye, C. (2013). GARCH-extended models: theoretical properties and applications. https://arxiv.org/abs/1307.6685
Nikkinen, J., & Sahlström, P. (2004a). Scheduled domestic and US macroeconomic news and stock valuation in Europe. Journal of Multinational Financial Management, 14(3), 201–215. https://doi.org/10.1016/j.mulfin.2003.01.001
Nikkinen, J., & Sahlström, P. (2004b). Impact of the federal open market committee’s meetings and scheduled macroeconomic news on stock market uncertainty. International Review of Financial Analysis, 13(1), 1–12. https://doi.org/10.1016/j.irfa.2004.01.001
Nikkinen, J., Omran, M., Petri, S., & Äijö, J. (2006). Global stock market reactions to scheduled U.S. macroeconomic news announcements. Global Finance Journal, 17(1), 92–104. https://doi.org/10.1016/j.gfj.2006.06.003
Onan, M., Salih, A., & Yasar, B. (2014). Impact of macroeconomic announcements on implied volatility slope of SPX options and VIX. Finance Research Letters, 11(4), 454–462. https://doi.org/10.1016/j.frl.2014.07.006
Pástor, L., & Veronesi, P. (2012). Uncertainty about government policy and stock prices. The Journal of Finance, 67(4), 1219–1264. https://doi.org/10.1111/j.1540-6261.2012.01746.x
Pástor, Ľ., & Veronesi, P. (2013). Political uncertainty and risk premia. Journal of Financial Economics, 110(3), 520–545. https://doi.org/10.1016/j.jfineco.2013.08.007
Raza, S. A., Zaighum, I., & Shah, N. (2018). Economic policy uncertainty, equity premium and dependence between their quantiles: Evidence from quantile-on-quantile approach. Physica A: Statistical Mechanics and its Applications, 492, 2079–2091. https://doi.org/10.1016/j.physa.2017.11.125
Reinhart, V., & Simin, T. (1997). The market reaction to Federal Reserve policy action from 1989 to 1992. Journal of Economics and Business, 49(2), 149–168. https://doi.org/10.1016/S0148-6195(96)00077-X
Rigobon, R., & Sack, B. (2004). The impact of monetary policy on asset prices. Journal of Monetary Economics, 51(8), 1553–1575. https://doi.org/10.1016/j.jmoneco.2004.02.004
Shaikh, I. (2017). The 2016 U.S. presidential election and the Stock, FX and VIX markets. The North American Journal of Economics and Finance, 42, 546–563. https://doi.org/10.1016/j.najef.2017.08.014
Shaikh, I. (2019a). On the relationship between economic policy uncertainty and the implied volatility index. Sustainability, 11(6), 1628. https://doi.org/10.3390/su11061628
Shaikh, I. (2019b). The relation between implied volatility index and crude oil prices. Engineering Economics, 30(5), 556–566. https://doi.org/10.5755/j01.ee.30.5.21611
Shaikh, I. (2020). Policy uncertainty and Bitcoin returns. Borsa Istanbul Review (in press). https://doi.org/10.1016/j.bir.2020.02.003
Wang, G.-J., Xie, C., Wen, D., & Zhao, L. (2019). When Bitcoin meets economic policy uncertainty (EPU): Measuring risk spillover effect from EPU to Bitcoin. Finance Research Letters, 31, 489–497. https://doi.org/10.1016/j.frl.2018.12.028
Wang, S., & Mayes, D. G. (2012). Monetary policy announcements and stock reactions: An international comparison. The North American Journal of Economics and Finance, 23(2), 145–164. https://doi.org/10.1016/j.najef.2012.02.002
Whaley, R. E. (2000). The investor fear gauge. The Journal of Portfolio Management, 26(3), 12–17. https://doi.org/10.3905/jpm.2000.319728
Witkowska, D., Kompa, K., & Mente, G. (2019). The effect of government decisions on the efficiency of the investment funds market in Poland. Journal of Business Economics and Management, 20(3), 573–594. https://doi.org/10.3846/jbem.2019.9861
Ashraf, B. N., & Shen, Y. (2019). Economic policy uncertainty and banks’ loan pricing. Journal of Financial Stability, 44, 100695. https://doi.org/10.1016/j.jfs.2019.100695
Badshah, I., Demirer, R., & Suleman, M. T. (2019). he effect of economic policy uncertainty on stockcommodity correlations and its implications on optimal hedging. Energy Economics, 84, 104553. https://doi.org/10.1016/j.eneco.2019.104553
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
Baker, S. R., Bloom, N., Davis, S. J., & Kost, K. (2019, March 25). Policy news and stock market volatility. http://www.policyuncertainty.com/media/Policy%20News%20and%20Stock%20Market%20Volatility.pdf
Bali, T. G., Brown, S. J., & Tang, Y. (2017). Is economic uncertainty priced in the cross-section of stock returns? Journal of Financial Economics, 126(3), 471–489. https://doi.org/10.1016/j.jfineco.2017.09.005
Chen, E.-T. J., & Clements, A. (2007). S&P 500 implied volatility and monetary policy announcements. Finance Research Letters, 4(4), 227–232. https://doi.org/10.1016/j.frl.2007.07.002
Christensen, B., & Prabhala, N. (1998). The relation between implied and realized volatility. Journal of Financial Economics, 50(2), 125–150. https://doi.org/10.1016/S0304-405X(98)00034-8
Christou, C., Cunado, J., Gupta, R., & Hassapis, C. (2017). Economic policy uncertainty and stock market returns in PacificRim countries: Evidence based on a Bayesian panel VAR model. Journal of Multinational Financial Management, 40, 92–102. https://doi.org/10.1016/j.mulfin.2017.03.001
Degiannakis, S., & Filis, G. (2019). Forecasting European economic policy uncertainty. Scottish Journal of Political Economy, 66(1), 94–114. https://doi.org/10.1111/sjpe.12174
Demir, E., Gozgor, G., Lau, C. K., & Vigne, S. A. (2018). Does economic policy uncertainty predict the Bitcoin returns? An empirical investigation. Finance Research Letters, 26, 145–149. https://doi.org/10.1016/j.frl.2018.01.005
Duan, Y., Chen, W., Zeng, Q., & Liu, Z. (2018). Leverage effect, economic policy uncertainty and realized volatility with regime switching. Physica A: Statistical Mechanics and its Applications, 493, 148–154. https://doi.org/10.1016/j.physa.2017.10.040
Engle, R. (2001). The use of ARCH/GARCH models in applied econometrics. Journal of Economic Perspectives, 15(4), 157–168. https://doi.org/10.1257/jep.15.4.157
Farka, M., & Fleissig, A. R. (2012). The effect of FOMC statements on asset prices. International Review of Applied Economics, 26(3), 387–416. https://doi.org/10.1080/02692171.2011.587111
Federal Open Market Committee. (2009, December 16). Minutes of the December 2009 Meeting. http://www.federalreserve.gov/monetarypolicy/fomcminutes20091216.htm
Gábor, E., & Georgarakos, D. (2018). Economic policy uncertainty and stock market participation. (CFS Working Paper No. 590). https://doi.org/10.2139/ssrn.3139007
Ghirelli, C., Pérez, J. J., & Urtasun, A. (2019). A new economic policy uncertainty index for Spain. Economics Letters, 182, 64–67. https://doi.org/10.1016/j.econlet.2019.05.021
Graham, M., Nikkinen, J., & Sahlström, P. (2003). Relative importance of scheduled macroeconomic news for stock market investors. Journal of Economics and Finance, 27(2), 153–165. https://doi.org/10.1007/BF02827216
Hu, Z., Kutan, A. M., & Sun, P.-W. (2018). Is US economic policy uncertainty priced in China’s A-shares market? Evidence from market, industry, and individual stocks. International Review of Financial Analysis, 57, 207–220. https://doi.org/10.1016/j.irfa.2018.03.015
Huang, Y., & Luk, P. (2020). Measuring economic policy uncertainty in China. China Economic Review, 59, 101367. https://doi.org/10.1016/j.chieco.2019.101367
Husted, L., Rogers, J., & Sun, B. (2019). Monetary policy uncertainty. Journal of Monetary Economics (in Press). https://doi.org/10.1016/j.jmoneco.2019.07.009
International Monetary Fund. (2012, October). World Economic Outlook: Coping with High Debt and Sluggish Growth. IMF Press.
Knapkova, M., Kiaba, M., & Hudec, S. (2019). Impact of macroeconomic indicators on public debt of Slovak Republic. Journal of Business Economics and Management, 20(4), 734–753. https://doi.org/10.3846/jbem.2019.10184
Nana, G.-A. N., Korn, R., & Erlwein-Saye, C. (2013). GARCH-extended models: theoretical properties and applications. https://arxiv.org/abs/1307.6685
Nikkinen, J., & Sahlström, P. (2004a). Scheduled domestic and US macroeconomic news and stock valuation in Europe. Journal of Multinational Financial Management, 14(3), 201–215. https://doi.org/10.1016/j.mulfin.2003.01.001
Nikkinen, J., & Sahlström, P. (2004b). Impact of the federal open market committee’s meetings and scheduled macroeconomic news on stock market uncertainty. International Review of Financial Analysis, 13(1), 1–12. https://doi.org/10.1016/j.irfa.2004.01.001
Nikkinen, J., Omran, M., Petri, S., & Äijö, J. (2006). Global stock market reactions to scheduled U.S. macroeconomic news announcements. Global Finance Journal, 17(1), 92–104. https://doi.org/10.1016/j.gfj.2006.06.003
Onan, M., Salih, A., & Yasar, B. (2014). Impact of macroeconomic announcements on implied volatility slope of SPX options and VIX. Finance Research Letters, 11(4), 454–462. https://doi.org/10.1016/j.frl.2014.07.006
Pástor, L., & Veronesi, P. (2012). Uncertainty about government policy and stock prices. The Journal of Finance, 67(4), 1219–1264. https://doi.org/10.1111/j.1540-6261.2012.01746.x
Pástor, Ľ., & Veronesi, P. (2013). Political uncertainty and risk premia. Journal of Financial Economics, 110(3), 520–545. https://doi.org/10.1016/j.jfineco.2013.08.007
Raza, S. A., Zaighum, I., & Shah, N. (2018). Economic policy uncertainty, equity premium and dependence between their quantiles: Evidence from quantile-on-quantile approach. Physica A: Statistical Mechanics and its Applications, 492, 2079–2091. https://doi.org/10.1016/j.physa.2017.11.125
Reinhart, V., & Simin, T. (1997). The market reaction to Federal Reserve policy action from 1989 to 1992. Journal of Economics and Business, 49(2), 149–168. https://doi.org/10.1016/S0148-6195(96)00077-X
Rigobon, R., & Sack, B. (2004). The impact of monetary policy on asset prices. Journal of Monetary Economics, 51(8), 1553–1575. https://doi.org/10.1016/j.jmoneco.2004.02.004
Shaikh, I. (2017). The 2016 U.S. presidential election and the Stock, FX and VIX markets. The North American Journal of Economics and Finance, 42, 546–563. https://doi.org/10.1016/j.najef.2017.08.014
Shaikh, I. (2019a). On the relationship between economic policy uncertainty and the implied volatility index. Sustainability, 11(6), 1628. https://doi.org/10.3390/su11061628
Shaikh, I. (2019b). The relation between implied volatility index and crude oil prices. Engineering Economics, 30(5), 556–566. https://doi.org/10.5755/j01.ee.30.5.21611
Shaikh, I. (2020). Policy uncertainty and Bitcoin returns. Borsa Istanbul Review (in press). https://doi.org/10.1016/j.bir.2020.02.003
Wang, G.-J., Xie, C., Wen, D., & Zhao, L. (2019). When Bitcoin meets economic policy uncertainty (EPU): Measuring risk spillover effect from EPU to Bitcoin. Finance Research Letters, 31, 489–497. https://doi.org/10.1016/j.frl.2018.12.028
Wang, S., & Mayes, D. G. (2012). Monetary policy announcements and stock reactions: An international comparison. The North American Journal of Economics and Finance, 23(2), 145–164. https://doi.org/10.1016/j.najef.2012.02.002
Whaley, R. E. (2000). The investor fear gauge. The Journal of Portfolio Management, 26(3), 12–17. https://doi.org/10.3905/jpm.2000.319728
Witkowska, D., Kompa, K., & Mente, G. (2019). The effect of government decisions on the efficiency of the investment funds market in Poland. Journal of Business Economics and Management, 20(3), 573–594. https://doi.org/10.3846/jbem.2019.9861