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The Role of Domestic and Global Economic Policy Uncertainties in Predicting Stock Returns and their Volatility for Hong Kong, Malaysia and South Korea: Evidence from a Nonparametric Causality-in-Quantiles Approach

Author

Listed:
  • Mehmet Balcilar

    (Eastern Mediterranean University, Turkey and University of Pretoria, South Africa)

  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Won Joong Kim

    (Department of Economics, Konkuk University, Seoul, Republic of Korea.)

  • Clement Kyei

    (Department of Economics, University of Pretoria)

Abstract
This paper analyses whether we can predict stock return and its volatility of Hong Kong, Malaysia and South Korea based on measures of domestic and global (China, the European Area, Japan, and the US) economic policy uncertainties (EPU). While, linear Granger causality tests fail to find evidence of predictability, barring the case of South Korean EPU predicting its own stock returns, when we use a nonparametric causality-in-quantiles test, strong evidence of causality is detected from the EPUs for stock return volatility of Malaysia, and both returns and volatility at certain parts of the conditional distributions for South Korea. There is no evidence of predictability from domestic and global EPUs for return and volatility of the Hong Kong stock market. Given the statistical evidence of nonlinearity in our data set, we consider the results from the nonparametric test as more robust relative to the standard linear causality test.

Suggested Citation

  • Mehmet Balcilar & Rangan Gupta & Won Joong Kim & Clement Kyei, 2015. "The Role of Domestic and Global Economic Policy Uncertainties in Predicting Stock Returns and their Volatility for Hong Kong, Malaysia and South Korea: Evidence from a Nonparametric Causality-in-Quant," Working Papers 201586, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201586
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    Citations

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    Cited by:

    1. Mehmet Balcilar & Rangan Gupta & Clement Kyei & Mark E. Wohar, 2016. "Does Economic Policy Uncertainty Predict Exchange Rate Returns and Volatility? Evidence from a Nonparametric Causality-in-Quantiles Test," Open Economies Review, Springer, vol. 27(2), pages 229-250, April.
    2. 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.
    3. Balcilar, Mehmet & Usman, Ojonugwa & Gungor, Hasan & Roubaud, David & Wohar, Mark E., 2021. "Role of global, regional, and advanced market economic policy uncertainty on bond spreads in emerging markets," Economic Modelling, Elsevier, vol. 102(C).
    4. 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.
    5. 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.

    More about this item

    Keywords

    Economic Policy Uncertainty; Stock Returns; Volatility; Linear Causality; Nonparametric Quantile Causality; Emerging Markets;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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