Industry-specific effects of economic policy uncertainty on stock market volatility: A GARCH-MIDAS approach

Abstract

<p>In recent years, monetary authorities have used unconventional monetary policy practices to stabilize economies. As a result, economic policy uncertainties have increased; subsequently, this has created fragilities in financial markets and exposed investors to greater levels of investment risk. However, recent literature suggests that volatility dynamics differ across industries, with some industries having hedging capabilities. On this basis, this study's objective is to explore the impact of economic policy uncertainty (EPU) on the volatility of different industries in South Africa. The GARCH-MIDAS approach was employed to achieve this objective, and nine industry-specific indices were evaluated from 3 January 2000 to 29 December 2023. The industry-specific analysis revealed that EPU has a negative relationship with the volatility in the following four industries: consumer discretionary, financials, health care, and technology. However, a positive relationship was found for the basic materials industry, while no significant effect was reported for consumer staples, energy, industrials, and telecommunications. Overall, these findings indicate that the EPU effects are asymmetric across industries and, therefore, it follows that the impact of EPU should be accounted for when making asset allocation choices.</p>