[go: up one dir, main page]
IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v18y2016icp291-296.html
   My bibliography  Save this article

Incorporating economic policy uncertainty in US equity premium models: A nonlinear predictability analysis

Author

Listed:
  • Bekiros, Stelios
  • Gupta, Rangan
  • Majumdar, Anandamayee
Abstract
Information on economic policy uncertainty does matter in predicting the US equity premium, especially when accounting for structural instabilities and omitted nonlinearities in their relationship, via a quantile predictive regression approach over the monthly period 1900:1–2014:2. Unlike as suggested by a linear mean-based predictive model, the extended quantile regression model with the incorporation of the EPU proxy, enhances significantly the out-of-sample stock return predictability. This is observed especially when the market is neutral, exhibits a slide or mildly upward trending behavior, yet not when the market appears to turn highly bullish.

Suggested Citation

  • Bekiros, Stelios & Gupta, Rangan & Majumdar, Anandamayee, 2016. "Incorporating economic policy uncertainty in US equity premium models: A nonlinear predictability analysis," Finance Research Letters, Elsevier, vol. 18(C), pages 291-296.
    • Handle: RePEc:eee:finlet:v:18:y:2016:i:c:p:291-296
    DOI: 10.1016/j.frl.2016.01.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S154461231630071X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2016.01.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Goodness C. Aye & Frederick W. Deale & Rangan Gupta, 2016. "Does Debt Ceiling and Government Shutdown Help in Forecasting the US Equity Risk Premium?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 63(3), pages 273-291, June.
    2. Chang, Tsangyao & Chen, Wen-Yi & Gupta, Rangan & Nguyen, Duc Khuong, 2015. "Are stock prices related to the political uncertainty index in OECD countries? Evidence from the bootstrap panel causality test," Economic Systems, Elsevier, vol. 39(2), pages 288-300.
    3. Jones, Paul M. & Olson, Eric, 2013. "The time-varying correlation between uncertainty, output, and inflation: Evidence from a DCC-GARCH model," Economics Letters, Elsevier, vol. 118(1), pages 33-37.
    4. Haroon Mumtaz & Francesco Zanetti, 2013. "The Impact of the Volatility of Monetary Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 535-558, June.
    5. Kyle Jurado & Sydney C. Ludvigson & Serena Ng, 2015. "Measuring Uncertainty," American Economic Review, American Economic Association, vol. 105(3), pages 1177-1216, March.
    6. Nicholas Bloom, 2009. "The Impact of Uncertainty Shocks," Econometrica, Econometric Society, vol. 77(3), pages 623-685, May.
    7. Kang, Wensheng & Ratti, Ronald A., 2013. "Structural oil price shocks and policy uncertainty," Economic Modelling, Elsevier, vol. 35(C), pages 314-319.
    8. Bekiros, Stelios & Gupta, Rangan & Kyei, Clement, 2016. "On economic uncertainty, stock market predictability and nonlinear spillover effects," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 184-191.
    9. Kang, Wensheng & Ratti, Ronald A., 2013. "Oil shocks, policy uncertainty and stock market return," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 305-318.
    10. Andrea Carriero & Haroon Mumtaz & Konstantinos Theodoridis & Angeliki Theophilopoulou, 2015. "The Impact of Uncertainty Shocks under Measurement Error: A Proxy SVAR Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(6), pages 1223-1238, September.
    11. Antonakakis, Nikolaos & Chatziantoniou, Ioannis & Filis, George, 2013. "Dynamic co-movements of stock market returns, implied volatility and policy uncertainty," Economics Letters, Elsevier, vol. 120(1), pages 87-92.
    12. Kang, Wensheng & Lee, Kiseok & Ratti, Ronald A., 2014. "Economic policy uncertainty and firm-level investment," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 42-53.
    13. Gupta, Rangan & Hammoudeh, Shawkat & Modise, Mampho P. & Nguyen, Duc Khuong, 2014. "Can economic uncertainty, financial stress and consumer sentiments predict U.S. equity premium?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 367-378.
    14. Koenker, Roger W & Bassett, Gilbert, Jr, 1978. "Regression Quantiles," Econometrica, Econometric Society, vol. 46(1), pages 33-50, January.
    15. Bekiros, Stelios & Gupta, Rangan, 2015. "Predicting stock returns and volatility using consumption-aggregate wealth ratios: A nonlinear approach," Economics Letters, Elsevier, vol. 131(C), pages 83-85.
    16. repec:mcb:jmoncb:v:45:y:2013:i::p:535-558 is not listed on IDEAS
    17. Rapach, David & Zhou, Guofu, 2013. "Forecasting Stock Returns," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 328-383, Elsevier.
    18. McCracken, Michael W., 2007. "Asymptotics for out of sample tests of Granger causality," Journal of Econometrics, Elsevier, vol. 140(2), pages 719-752, October.
    19. Jushan Bai & Pierre Perron, 2003. "Computation and analysis of multiple structural change models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 18(1), pages 1-22.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christou, Christina & Gupta, Rangan, 2020. "Forecasting equity premium in a panel of OECD countries: The role of economic policy uncertainty," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 243-248.
    2. Chuliá, Helena & Gupta, Rangan & Uribe, Jorge M. & Wohar, Mark E., 2017. "Impact of US uncertainties on emerging and mature markets: Evidence from a quantile-vector autoregressive approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 178-191.
    3. Balcilar, Mehmet & Gupta, Rangan & Kim, Won Joong & Kyei, Clement, 2019. "The role of economic policy uncertainties in predicting stock returns and their volatility for Hong Kong, Malaysia and South Korea," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 150-163.
    4. Christou, Christina & Cunado, Juncal & Gupta, Rangan & Hassapis, Christis, 2017. "Economic policy uncertainty and stock market returns in PacificRim countries: Evidence based on a Bayesian panel VAR model," Journal of Multinational Financial Management, Elsevier, vol. 40(C), pages 92-102.
    5. Bekiros, Stelios & Gupta, Rangan & Kyei, Clement, 2016. "On economic uncertainty, stock market predictability and nonlinear spillover effects," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 184-191.
    6. Nonejad, Nima, 2021. "Predicting equity premium using news-based economic policy uncertainty: Not all uncertainty changes are equally important," International Review of Financial Analysis, Elsevier, vol. 77(C).
    7. Bonaccolto, G. & Caporin, M. & Gupta, R., 2018. "The dynamic impact of uncertainty in causing and forecasting the distribution of oil returns and risk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 507(C), pages 446-469.
    8. Serdar Ongan & Ismet Gocer, 2017. "Testing The Causalities Between Economic Policy Uncertainty And The Us Stock Indices: Applications Of Linear And Nonlinear Approaches," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 1-20, December.
    9. You, Wanhai & Guo, Yawei & Zhu, Huiming & Tang, Yong, 2017. "Oil price shocks, economic policy uncertainty and industry stock returns in China: Asymmetric effects with quantile regression," Energy Economics, Elsevier, vol. 68(C), pages 1-18.
    10. Kang, Wensheng & Perez de Gracia, Fernando & Ratti, Ronald A., 2017. "Oil price shocks, policy uncertainty, and stock returns of oil and gas corporations," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 344-359.
    11. Nonejad, Nima, 2022. "Predicting equity premium out-of-sample by conditioning on newspaper-based uncertainty measures: A comparative study," International Review of Financial Analysis, Elsevier, vol. 83(C).
    12. Hong, Yun & Zhang, Rushan & Zhang, Feipeng, 2024. "Time-varying causality impact of economic policy uncertainty on stock market returns: Global evidence from developed and emerging countries," International Review of Financial Analysis, Elsevier, vol. 91(C).
    13. Stavros Degiannakis & George Filis, 2019. "Forecasting European economic policy uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(1), pages 94-114, February.
    14. Bekiros, Stelios & Gupta, Rangan & Paccagnini, Alessia, 2015. "Oil price forecastability and economic uncertainty," Economics Letters, Elsevier, vol. 132(C), pages 125-128.
    15. Rangan Gupta & Anandamayee Majumdar & Mark E. Wohar, 2017. "The Role of Current Account Balance in Forecasting the US Equity Premium: Evidence From a Quantile Predictive Regression Approach," Open Economies Review, Springer, vol. 28(1), pages 47-59, February.
    16. Chin Chia Liang & Carol Troy & Ellen Rouyer, 2020. "The Stock Price Impact of Domestic and Foreign Economic Policy Uncertainty: Evidence from China," Economics Bulletin, AccessEcon, vol. 40(2), pages 1747-1755.
    17. Yuan, Di & Li, Sufang & Li, Rong & Zhang, Feipeng, 2022. "Economic policy uncertainty, oil and stock markets in BRIC: Evidence from quantiles analysis," Energy Economics, Elsevier, vol. 110(C).
    18. Liang, Chin Chia & Troy, Carol & Rouyer, Ellen, 2020. "U.S. uncertainty and Asian stock prices: Evidence from the asymmetric NARDL model," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    19. Gupta, Rangan & Ma, Jun & Risse, Marian & Wohar, Mark E., 2018. "Common business cycles and volatilities in US states and MSAs: The role of economic uncertainty," Journal of Macroeconomics, Elsevier, vol. 57(C), pages 317-337.
    20. Rangan Gupta & Chi Keung Marco Lau & Mark E. Wohar, 2019. "The impact of US uncertainty on the Euro area in good and bad times: evidence from a quantile structural vector autoregressive model," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 46(2), pages 353-368, May.

    More about this item

    Keywords

    Stock markets; Economic uncertainty; Predictability; Quantile regression;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:18:y:2016:i:c:p:291-296. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.