International Fund Allocation under Economic Policy Uncertainty Shock

PurposeThis paper aims to investigate the effect of economic policy uncertainty (EPU) shocks on Indian equity market sectors. The effect of domestic (Indian) and foreign (USA) EPU shocks is examined on ten major Bombay Stock Exchange sectors.Design/methodology/approachThe study uses data covering the period from September 2005 to July 2023 and uses the methodology of quantile regression to investigate the heterogenous response of stock market sectors under diverse market conditions explained through the analysis of conditional quantiles distribution.FindingsThe results demonstrate that domestic and foreign EPU shocks negatively affect most of the sectors in bearish market conditions. Industrials, commodities, utilities, consumer discretionary and financial services are the most affected sectors by domestic EPU. However, the information technology sector is found to be immune to domestic EPU shocks but negatively affected by foreign EPU shocks. On the other hand, energy, financial services and fast-moving consumer goods sectors are found to be immune to foreign EPU shocks but are negatively affected by domestic EPU shocks.Practical implicationsUnderstanding the heterogeneous response of different sectors to EPU shocks could help investors and portfolio managers identify portfolio diversification opportunities.Originality/valueThis study makes an inaugural attempt to examine the responses of Indian stock market sectors to domestic and foreign EPU shocks using the approach of quantile regression and unveils the previously unexamined diverse reactions of Indian stock market sectors to EPU shocks originating from both India and USA.

This paper proposes a framework for examining the interaction between stock market volatilities and economic uncertainty shocks, aiming to understand better the influence of economic uncertainty shocks on the Chinese stock market. The major empirical results include the followings. First, the economic policy uncertainty shocks push the Chinese stock volatility up, increasing the market risk. A 1‐standard‐deviation shock of economic policy uncertainty will enhance the stock volatility of the two composite indices by approximately 7% in 12 months. Second, the stock volatility reacted more intensely to fiscal and monetary economic policy uncertainty shocks, with a 1‐standard‐deviation shock that can enhance the stock volatility of the two composite indices by more than 10% in 12 months. Third, different stock indices exhibit different patterns of cumulative impulse responses, and the reaction of the volatility of the SSE real estate index to economic policy uncertainty shocks is more significantly intense than other indices. Besides, we have proved the robustness of empirical results by reestimating the models with a lag order of 2. Overall, our research results can provide policy and managerial insights for the sustainable development of the Chinese stock market and beyond.

Economic policy uncertainty shocks, economic activity, and exchange rate adjustments

Estimating a large‐scale factor‐augmented vector autoregressive model for 18 Organisation for Economic Co‐operation and Development member countries, we quantify the global effects of economic policy uncertainty shocks. More specifically, we check whether the signs, the magnitude, and the persistence profile are consistent with the literature on the real and financial sector effects of uncertainty. In that respect, we compare the impacts of a U.S. and a Euro area policy uncertainty shock. According to our results, an increase in economic policy uncertainty has a strong negative impact on economic activity (gross domestic product), consumer prices, equity prices, and interest rates. Uncertainty shocks cause deeper recessions in Continental Europe (except Germany) than in Anglo‐Saxon countries. U.S. uncertainty shocks have a bigger impact than those for the Euro area. Economic policy uncertainty does not only affect that country where the shock originates but also has large cross‐border effects. We also find a high degree of synchronization among the responses of national variables to a (foreign) uncertainty shock, indicating evidence of an international business cycle. With respect to the responses of national long‐term interest rates to an economic policy uncertainty shock, our results reveal a strong “North‐South” divide within the Euro area with rates decreasing less significantly in the South. Moreover, economic policy uncertainty shocks emerging in one region quickly raise uncertainty outside the region of origin. (JELC32, F42, D80)

This study investigates the impacts of economic policy uncertainty on the Bitcoin market using the monthly data from January 2014 to December 2022. In so doing, six major uncertainty indices (Global Economic Policy Uncertainty, Equity Market Volatility, Twitter‐based Economic Uncertainty, Geopolitical risk index, The Cryptocurrency Policy Uncertainty Index, The Cryptocurrency Price Uncertainty Index), and in particular, two novel Cryptocurrency Uncertainty indexes as introduced by Lucey et al. (2022) are taken into account. Our findings uncover a negative connectedness between Bitcoin prices and the key selected uncertainty indices, suggesting that higher uncertainties result in lower Bitcoin fluctuation across time and frequency domains. Our results provide valuable information on constructing asset portfolios for investors who have investment strategies entailing Bitcoin since Bitcoin would be a diversifier under economic policy uncertainty shocks. Our results hold robust by using the alternative methodology.

The paper studies the effects of foreign (the US, the UK and the Chinese) and domestic economic policy uncertainty (EPU) shocks on unemployment in Germany, France, Italy and Spain. The analysis is run separately for the rates of adult and youth unemployment. Impulse responses derived from vector autoregressive models show that the magnitudes of the responses of the adult and youth segments of the labour market are quite different. Following an uncertainty shock, the youth unemployment rate increases significantly more than the adult unemployment rate. This is the case for France, Italy and Spain. The German labour market seems to be resistant to foreign (except Chinese) and domestic EPU shocks, while the remaining labour markets, foremost the Spanish and Italian ones, are susceptible to uncertainty shocks, especially to the US EPU shocks.

This study investigates the impact of economic policy uncertainty (EPU) on food prices (FP) in case of Pakistan by using monthly time series data from Jan 2011 to Dec 2023. The study utilized unit root tests such as, Augmented Dickey Fuller (ADF) and Phillips Perron (PP) tests to check the stationarity of the variables. To investigate the asymmetric relationship between EPU and FP, the study utilizes the Nonlinear Autoregressive Distributed Lag (NARDL) model along with the Bounds testing approach to determine the presence of long-run cointegration. The short-run results from the NARDL estimation indicate that an increase in EPU has a negative effect, leading to a decline in food prices. Conversely, the long-run findings reveal that EPU has a positive and significant impact on food prices. Additionally, the finding of Bound test confirmed the long-term Cointegration between EPU and food prices. This implies that to executing strategies that stabilize the macroeconomic environment and enhance market confidence can alleviate the inflationary effects of policy uncertainty on food prices. Further, improving supply chain resilience and establishing early-warning systems can help manage short-term price fluctuations caused by economic uncertainty.

In this paper, we empirically explore the impact of uncertainty in economic policy and industrial intelligence on firms’ labor productivity, as well as the possible methods and mechanisms of influence. After theoretical inference, we employ regression models with sample data collected from A-share companies in the manufacturing industry listed on the Shanghai and Shenzhen stock exchanges between 2007 and 2019. We find that firms’ labor productivity experiences a significant decrease under economic policy uncertainty. However, the negative effect of economic policy uncertainty shocks on labor productivity in regions with high industrial intelligence levels is effectively mitigated. These differential changes in the impact of economic policy uncertainty shock on labor productivity between areas with high and low industrial intelligence levels are found primarily for firms in high-technology and highly specialized sectors, sectors with strong financial constraints. Besides, we perform further analysis which indicates that the upgrading of human capital operates as an essential channel for economic policy uncertainty shocks and industrial intelligence to affect firms’ labor productivity. Overall, our findings illustrate that implementing economic policies in a stable and transparent way and developing intelligent technology can improve firms’ labor productivity.

Under the background that economic policy uncertainty tends to be normal, the innovation behavior of enterprises can cope with the cost impact brought by economic policy uncertainty. Based on the relevant data of China's A-share pharmaceutical listed companies from 2015 to 2022, this paper empirically studied the relationship between economic policy uncertainty and firm innovation by using fixed-effect model, intermediary model, instrumental variable method and two-step method, and investigated the mechanism effects of financialization, executive compensation and government subsidies. Economic policy uncertainty significantly increases the innovation intensity of enterprises. Enterprises with dual management, overseas background and non-state-owned ownership will increase their innovative behavior in the face of economic policy uncertainty. Further analysis shows that economic policy uncertainty increases the innovation intensity of enterprises through three mechanisms: increasing financial transformation, obtaining government subsidies and motivating management. Increasing the innovation intensity of enterprises can deal with the risk impact caused by economic policy uncertainty, but can not deal with the negative impact of cost increase. The transformation of financialization can help enterprises cope with the operational risks and later costs caused by economic policy uncertainty. This study provides empirical evidence for the theoretical inference that firms respond to the impact of economic policy uncertainty and thus increase their innovation behavior.

Using a quarterly panel of U.S. corporations over the period 1985–2014, we show that corporate managers respond to political uncertainty and economic policy uncertainty shocks in different ways. We proxy for political uncertainty using the Partisan Conflict Index and employ a prevalent empirical macroeconomic methodology to construct structural shocks that are orthogonal to shocks captured by the Economic Policy Uncertainty Index. Following a political uncertainty shock, corporations increase cash but do not adjust investment. Alternatively, following an economic policy uncertainty shock, firms appear to draw on cash and reduce capital spending to increase research and development spending.

Since the 2008 financial crisis, EPU has become an important issue for the stable and healthy development of the economy and society. The existing research has not analyzed the nonlinear impact of economic policy uncertainty (EPU) on output at the industrial level, and it has also ignored the regulatory role of technological progress in the impact of EPU on economic growth. Based on panel data of China’s industry from 2005 to 2017, this paper makes an empirical analysis on the nonlinear impact of EPU on industry output. The results show that: (1) Different from the existing research, this paper finds that EPU has a significant inverted “U”-type nonlinear effect on industrial output, and when the EPU index is close to 221, this is best for output growth. This paper firstly finds that technological progress has a positive regulatory effect in the impact of EPU on industrial output. Technological progress can promote industrial output when EPU is low, and it can reduce the adverse impact of economic policy fluctuations when the EPU index is high. (2) The regulatory effect of technological progress only exists in the industries dominated by state-owned enterprises, and the impact of EPU on the output of non-state-owned enterprises’ leading industries is greater than that of state-owned enterprises. (3) The impact of EPU on the output of cyclical industries shows a significant inverted “U” shape, but there is no regulatory effect of technological progress. Its impact on the output of noncyclical industries is not significant, but it will work together with technological progress. (4) The influence of EPU on the output of the tertiary industry is characterized by an inverted “U” shape, in which technological progress can play a positive regulatory role. However, its impact on the output of primary and secondary industries is not significant.

PurposeThis study investigates the impact of economic policy uncertainty on corporation innovation in innovative cities. The study sheds light on different results from the previous literature by testing the moderator effects of entrepreneurial risk appetite on such impact.Design/methodology/approachA static panel estimator is applied to a Chinese sample of 416 firm-year observations from 2010 to 2019. This paper uses regression model to test the impact of uncertainty on enterprise innovation in innovative cities, and to test the regulatory role of entrepreneurial risk appetite. For a series of robustness analysis conducted by the author to deal with endogeneity, the results are robust.FindingsThe author finds reliable evidence that the economic policy uncertainty can promote corporations to invest more in R&D in innovative cities. In addition, the role of the entrepreneurial initiative is significant, and there is a positive moderating effect of entrepreneurial risk appetite between policy uncertainty and corporation innovation.Research limitations/implicationsFrom a practical point of view, this study examines the impact of economic policy uncertainty on corporation innovation in innovative cities for the first time. It emphasizes the role of entrepreneurial risk-taking in the development of corporation innovation in Shenzhen, an innovative city. This research is of great significance to the formulation of government policies and the innovative choice of entrepreneurs. In addition, the research shows that the entrepreneurial risk appetite in innovative cities can have a positive impact on enterprise innovation. Therefore, when formulating policies, the government should take the subjective factors of entrepreneurs into account and support enterprises with innovation potential. The evidence of this study also helps entrepreneurs make innovative decisions and enhance their confidence in enterprise development.Originality/valueBy studying the impact of economic policy uncertainty on enterprise innovation under the regulation of enterprise risk appetite, this study shows the subjective and positive role of entrepreneurs in risk grasp in innovative cities for the first time. In addition, it fills the gap of the impact of policy uncertainty on innovative urban enterprises. In fact, although it is traditionally believed that economic policy uncertainty has a negative impact on enterprise innovation, the sensitive findings of this study reveal completely different results from previous studies.

In recent years, economic policy uncertainty has been a hot topic in the world, and the development level of service trade is one of the symbols to measure a country's economic strength. Nowadays, the world economy is transforming to the globalization of digital economy, in which information and communication technology (ICT) plays an important role in the process of digital development. Taking service trade as the starting point, using the economic policy uncertainty index and taking the data of China's ICT service exports from 2001 to 2019 as a sample, this paper studies the impact of economic policy uncertainty on China's ICT service exports. The study found that China's economic policy uncertainty is conducive to the export of ICT services, while the global economic policy uncertainty has a restraining effect on it. Based on this, this paper puts forward policy suggestions on China's ICT service trade from the perspective of strengthening multilateral cooperation and increasing policy support of exporting countries.

The impact of economic policy uncertainties on the volatility of European carbon market

This study employs the economic policy uncertainty index to gauge the level of economic policy uncertainty in China. Utilizing textual data from the growth enterprise market internet community, we construct the growth enterprise market investor sentiment index by applying the deep learning ERNIE (Enhanced Representation through Knowledge Integration) model, thereby capturing investors’ sentiment within the growth enterprise market. The dynamic interplay between economic policy uncertainty, investor sentiment, and returns of the growth enterprise market is scrutinized via the TVP-SV-VAR (time-varying parameter stochastic volatility vector auto-regression) model, and the asymmetric response of different industries’ stock returns within the growth enterprise market to economic policy uncertainty and investor sentiment shock. The findings of this research are that economic policy uncertainty exerts a negative influence on both investor sentiment and returns of the growth enterprise market. While it may trigger a temporary decline in stock prices, the empirical evidence suggests that the impact is of short duration. The influence of investor sentiment on the growth enterprise market returns is characterized by a reversal effect, suggesting that improved sentiment may initially boost stock prices but could lead to a subsequent decline over the long term. The relationship between economic policy uncertainty, investor sentiment, and returns of the growth enterprise market is time-variant, with heightened sensitivity observed during bull markets. Lastly, the effects of economic policy uncertainty and investor sentiment on the returns of different industries within the growth enterprise market are found to be asymmetric. These conclusions contribute to the existing body of literature on the Chinese capital market, offering a deeper understanding of the complex dynamics and the factors influencing market behavior.