The effect of economic policy uncertainty on the long-term correlation between U.S. stock and bond markets

Fang, Libing; H, Yu; Li, Lei

doi:10.1016/j.econmod.2017.06.007

Cited by 100 publications

(43 citation statements)

References 28 publications

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“…Gulen and Ion (2015) provides empirical evidence that due to such uncertainties, investment decisions become more risker and expensive, which ultimately decreases liquidity and US stock market returns. Fang et al (2017) observed negative correlation between US bonds and stock returns during high economic policy uncertainty periods and conclude that during periods of policy uncertainty demand for bonds is higher than stocks as investor substitute safe assets to the risky ones in their portfolio. Kang et al (2014) report that investment decisions at firm's level are delayed or depressed when EPU is coupled with firm level uncertainty.…”

Section: Literature Reviewmentioning

confidence: 78%

Are disaggregate industrial returns sensitive to economic policy uncertainty

Rehman

Asghar

Hussain

2019

Physica A: Statistical Mechanics and its Applications

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This study investigates the impact of economic policy uncertainty on disaggregate US sector based returns. Our work is motivated by the presence of non-linear relationship between US economic policy uncertainty and equity returns of sampled US sectors. The paper uses weekly data from January 1995 to December 2015 for all the return indices and economic policy uncertainty data mainly based on policy issues, provision set for the US federal tax code and disagreement among economic forecasters. Our results indicate that information technology, utilities, industrial and telecommunication sectors remain insensitive to changes in the US economic policy uncertainty. However, financial and the consumer discretionary sectors show significant long run asymmetric relationship with the EPU.

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Section: Literature Reviewmentioning

confidence: 78%

Are disaggregate industrial returns sensitive to economic policy uncertainty

Rehman

Asghar

Hussain

2019

Physica A: Statistical Mechanics and its Applications

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“…According to the argument, in times of market turbulence, investors prefer a stable bond market over the stock market (Ilmanen, 2003;Bayraci, Demiralay and Gencer, 2018). Fang et al (2017) found similar results, where the level of certainty in the economy affected the correlation in the price movements among the bond and stock markets. We can extend this explanation of negative price relationship between the two markets to the negative relationship of liquidity, we observed in our results.…”

Section: Results and Analysismentioning

confidence: 93%

Liquidity in Asian Financial Markets: Crowding Out or Spillover Effect

Thukral

Sikka

2020

AFL

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The paper attempts to explore the relationship between the stock market and the corporate bond market, with a focus on the inter-dependency of liquidity between the two markets. The study employs a panel dataset to assess the impact of stock market liquidity on the corporate bond market liquidity for top five Asian economies (ranked by GDP) for the period 2008-2017. In contrast to limited number of earlier studies that reported a spillover effect of liquidity among the markets for stock and government bonds, the results of the present study convey that an increase in stock market liquidity tends to eat up the liquidity of the corporate bonds, even after controlling for government bond yield and inflation rate changes. The findings indicate a crowding out effect instead of a spillover effect, as indicated by related studies. The ‘flight-to-quality’ argument provides one possible explanation of liquidity moving away from one market to the other. This has an implication that if regulators’ policies are focused in developing only one type of market, it may crowd out the liquidity and the development of the other market. The study suggests the government to focus more on corporate bond market, which is yet to flourish in the Asian markets as compared to its stock market counterparts. The paper is one of the few attempts that focus on the corporate bond market and its liquidity and aims to ignite a debate on the possible linkages between liquidity of corporate bond market and the stock market.

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“…In addition, the EPU could also draw a negative influence in the U.S. stock-bond market correlation with long-term investors in corresponding results from Fang, Yu, and Li (2017).…”

Section: Literature Reviewmentioning

confidence: 98%

The Economic Policy Uncertainty in China, the United States, and Europe: The Empirical Impact on Chinese Stock Markets

Supachart

2019

AEF

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The objective of this paper is to analyze the impact of economic policy uncertainty (EPU) in China, the United States, and Europe, which are influent to the Chinese stock markets. We employed Vector Autoregression (VAR) model with relative variables including the EPU indices and three Chinese stock markers indices to display the impulse responses of the markets to the EPUs. Our results indicate that the Chinese stock markets negatively respond to their domestic economic policy uncertainty in the first, second, and third month after the EPU shocks. Moreover, we also found the negative responses of the Chinese markets to the EPU from the United States that require five months to rebalance the markets. However, the Chinese markets seem positively respond to the shocks of the economic policy uncertainty in Europe and also took five months to archive market rebalancing. The significant correlation of the economic policy uncertainty between China and the United States resulted in cross-sectional correlation estimates among the EPU indices. Furthermore, there is the reasonable interesting result to claim that the economic policy uncertainty in China is statistically influenced by their own trade and fiscal policy uncertainty that may be considered to be related with China-US trade war in our conclusion.

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The effect of economic policy uncertainty on the long-term correlation between U.S. stock and bond markets

Cited by 100 publications

References 28 publications

Are disaggregate industrial returns sensitive to economic policy uncertainty

Are disaggregate industrial returns sensitive to economic policy uncertainty

Liquidity in Asian Financial Markets: Crowding Out or Spillover Effect

The Economic Policy Uncertainty in China, the United States, and Europe: The Empirical Impact on Chinese Stock Markets

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