Policy uncertainty in Australian financial markets

Effect of trade and economic policy uncertainties on regional systemic risk: Evidence from ASEAN

The stability of U.S. economic policy: Does it really matter for oil price?

Purpose The purpose of this paper is to test if building reputation capital through environmental, social and governance (ESG) investing can mitigate the negative effect of economic policy uncertainty (EPU) on firms’ valuation. Design/methodology/approach This study uses an unbalanced panel of 591 financial firms between 2005 and 2021 from Canada, France, Germany, Italy, Japan, the United Kingdom (UK) and the USA. Ordinary least square method is used in the empirical tests. To alleviate a potential endogeneity problem, robustness tests are performed using the two-stage least square approach with instrumental variables. Findings The results of this paper show that sustainable reporting can offset the negative effect of EPU on the valuation of financial firms. Consistent with the stakeholder-based reputation-building hypothesis, sustainability performance may have an insurance-like impact on firms’ valuation during periods of high uncertainty. Practical implications According to the findings, during high policy uncertainty periods, investors accept to pay a premium for the stocks of the firms which built social capital through environmental and social investments. Accordingly, it is suggested that regulatory bodies and governments motivate firms to increase their stakeholder orientation to attain higher reputation capital. Social implications Managers can mitigate the negative impact of policy uncertainty on the value of their firms via building social capital, which will increase financial market stability in return, and portfolio investors may use such firms for portfolio optimization decisions. Originality/value To the best of the authors’ knowledge, this paper is one of the first to examine the mitigating role of ESG investing on EPU and firm valuation relationships for financial firms. Thus, this study provides new insights related to the impact of ESG performance on valuation during uncertain times.

As economies become increasingly interconnected, individual economies are at risk of shocks from external uncertainties ranging from fluctuations in climate regulations to geopolitical conflicts and international economic policies.The purpose of the study is to investigate the time-varying correlation between global uncertainties (e. g., global economic policy uncertainty, climate policy uncertainty and geopolitical risk) and economic activity in a developing economy using a dynamic conditional correlation generalized autoregressive conditional heteroskedasticity (GARCH) model.The relevance of the research lies in the increasing interconnectedness of global economies and the subsequent exposure of individual economies to external shocks.The scientific novelty is hinged on the study being among the first to study the relationship in Ghana. Using monthly data for the 2002–2022 period for Ghana, we estimate a multivariate GARCH model.The results of the study indicate that climate policy uncertainty and global economic policy uncertainty are mean reverting, implying that the volatility of the variables decay slowly and persists for a longer time such that the conditional variance will eventually return to its long-term average level after being disturbed by shocks. Global uncertainties over time are strongly negatively correlated with economic activity and produce significant spikes, especially during periods of major world events.The study recommends that policymakers need to consider the prolonged impact of global uncertainties on economic performance when designing economic policies and interventions. The significant spikes during major global events highlight the importance of crisis management and preparedness in maintaining economic stability during periods of heightened uncertainty.

Coupling between global climate policy uncertainty and economic policy uncertainty

As global power structures shift and energy security becomes increasingly politicized, tracing the cross-border transmission of uncertainty between economically and strategically linked nations has become crucial. This study investigates the dynamic interdependence of economic policy uncertainty (EPU) and energy-related uncertainty (EUI) between Germany and Russia over 2001–2023. We first examine bilateral linkages between the EPU and EUI indices using static and dynamic correlation measures. Standard and time-varying Granger causality tests reveal a persistent unidirectional influence from German to Russian EPU, while reverse causality remains weak. In the EUI domain, the causal structure is more volatile and bidirectional, with Russia influencing Germany before the 2022 Russo-Ukrainian War, but Germany becoming the dominant driver afterward. To isolate the role of energy in the transmission of policy uncertainty, we orthogonalize each country's EPU with respect to its own EUI. The results show that much of the bilateral EPU correlation is energy-driven; however, Germany's EPU component, unrelated to energy, still significantly affects Russian EPU in the post-war period. These findings highlight the strategic importance of energy policy in shaping macroeconomic uncertainty and highlight the need for its explicit integration into international economic policymaking.

Purpose This paper aims to study the transmission of shocks from global macroeconomic variables to international trade volumes of an emerging market economy. Design/methodology/approach This paper estimates the return and volatility spillovers from global factors such as crude price, global economic activity and global policy uncertainty to India’s imports and exports. This paper also includes the effects of real exchange rate, credit availability, domestic output gap and domestic policy uncertainty. The paper uses wavelet time-scale decomposition analysis to extract the spillovers received by imports and exports at various frequencies, which are otherwise invisible in the raw data. The conditional volatility of variables is extracted using the ARMA-GARCH model. Findings The results show that India’s imports and exports receive return spillovers from real exchange rate, credit availability, crude price and global economic policy uncertainty at lower frequencies. India’s exports receive volatility spillovers from global economic activity at higher frequencies. Research limitations/implications Because different factors impact trade cycles in the short term and long term, understanding the spillovers at different frequencies is essential for policymakers, businesses and investors to prepare for potential economic fluctuations. Practical implications This paper observes spillovers from REER to trade at lower frequency cycles, which calls for better foreign exchange hedging options in the medium to long term. Social implications Enhancing economic partnerships, reducing trade barriers and attracting foreign capital to foster local production could help manage trade spillovers. Originality/value While existing studies used the wavelet method to estimate spillovers in economic and financial variables, to the best of the authors’ knowledge, there is no study using this method to examine spillover from global and domestic macroeconomic variables to international trade. This paper fills this gap.

We analyse the fluctuating connection between economic policy uncertainty (EPU) and oil prices (OP) in Croatia through sub-sample rolling-window Granger causality analyses. Statistical inference based on Granger causality tests suggests that OP acts as a leading indicator for EPU, with evidence of bidirectional feedback. The negative influence of OP on EPU indicates that OP will affect the government?s economic policy stability and then affect EPU. Conversely, EPU exhibits both positive and detrimental effects on OP. These results align with general equilibrium models, highlighting the interdependence between OP and EPU. Given the increasing financial attributes of oil, gaining insight into the connection between OP and EPU is essential for enabling the government to formulate more effective economic policies to mitigate the impacts of fluctuations in OP.

Problem definition: The uncertainty around trade and foreign economic policy contributes to supply chain risk. Academic/practical relevance: Whether such policy uncertainty will bring some production back to the United States or only redistribute the global supply chains among foreign sources is theoretically ambiguous and warrants an empirical analysis. In this paper, we study the relationship between trade and foreign economic policy uncertainty and the supply chain networks of American firms. Methodology: We use firm-level global supply chain data, transaction-level shipping container data, and policy uncertainty indexes constructed from leading media outlets to study how policy uncertainty correlates with changes in supply chain networks. Results: When U.S. trade policy uncertainty rises, firms with majority domestic sales decrease their supplier base abroad, whereas firms with majority foreign sales increase the number of foreign suppliers. Firms also substitute among foreign countries in response to their respective economic policy uncertainty—shifting suppliers from countries with higher uncertainty to ones with lower uncertainty. Firms requiring more specific inputs, producing more differentiated products, having higher market shares, and more central to the production network are more sensitive to policy uncertainty. Managerial implications: Supply chain restructuring following higher policy uncertainty puts the market value at risk. Managers should consider customers’ locations when making global supply chain restructuring decisions. Funding: B. Charoenwong acknowledges funding from the National University of Singapore [Start-Up Grant R-315-000-119-133] and the Singapore Ministry of Education [AcRF (Academic Research Fund) Tier 1 Grant R-315-000-122-115]. J. Wu acknowledges funding from the Hong Kong RGC (Research Grants Council) [Grant 14504621]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2022.1136 .

Grounded in the Granger causality test, vector autoregression (VAR) model, and BEKK-GARCH model, our current study aims to examine the effect of mean and volatility spillover between the United States (US) economic policy uncertainty (EPU) and West Texas Intermediate (WTI) crude oil price. Using the US EPU monthly index and WTI spot price data from 1996 to 2019, we revealed that there is a one-way Granger causality link between the US EPU and spot price of WTI crude oil. The VAR model not only illustrated that there is a mean spillover effect between WTI oil price and US EPU, but they will also be affected by its memory, as well as the other’s past. At the same time, it also pointed out that this correlation has positive and negative directions. The BEKK-GARCH model test yielded similar conclusions to the VAR model and, importantly, proved a two-way volatility spillover effect between the US EPU and WTI spot price fluctuations. In conclusion, US economic policy has a substantial influence on the variation of global crude oil prices, as an essential strategic reserve resource and will also influence the government’s economic policy formulation. Understanding the association between WTI crude oil price and policy uncertainty not only helps investors to manage assets allocations and mitigate losses but also guides US policymakers to adjust the energy structure for economic sustainability.

In recent years, the frequent adjustment of the government’s economic policies and the uncertainty of foreign economic situations have made the degree of uncertainty of China’s economic policies rise continuously. The increasing degree of policy uncertainty will inevitably affect the investment and financing decisions of micro enterprises. Then, how does economic policy uncertainty (EPU) affect mergers and acquisitions (M&A) behavior? What’s the mechanism? Based on the above questions, this paper uses the data of non-financial listed companies in the Shanghai and Shenzhen stock exchanges from 2008 to 2018 as a sample to explore the relationship between EPU and M&A. The study shows that rising EPU will promote corporate M&A behavior, and this effect is more significant in slow-growth companies. The relationship between EPU and M&A is affected by corporate governance, stock price volatility and financing constraints. Specifically, the company’s M&A size is more sensitive to EPU with higher level of corporate governance, higher level of stock price volatility, and lesser financing constraints. Further research shows that the rise of EPU will significantly promote the improvement of M&A performance in the short-term, but this effect does not exist in the long-term. Various robustness checks do not change the empirical results of this paper.

Examining the relationship between policy uncertainty and market uncertainty across the G7

PurposeIn recent times, sustainable investment gaining much attention within the investors’ community and it is broadly driven by environmental, social and governance (ESG) factors. This study aims to examine the ESG-based sustainability index and economic policy uncertainty (EPU).Design/methodology/approachCorporate sustainability assessment procedure yields Dow Jones sustainability indexes (DJSIUS) and ESG compliant firms become a member of such indexes. To uncover the effects of policy uncertainty as follows: the study considers EPU index, equity market policy uncertainty index, economic and political events for the period 2000–2017. The authors present the study using a conditional volatility framework.FindingsThe correlation between the DJSIUS and policy uncertainty appears to be negative and statistically significant. It is apparent from the results that policy uncertainty does contain important ESG factors that explain the sustainable investment in US firms. Moreover, the stock market boom, credit crunch, Lehman collapse and fiscal crises have shown significant adverse effects on the sustainability index. More importantly, it is seen that investors’ sustainable investing considers presidential election years for portfolio planning; the uncertainty associated with the election years has also shown a negative impact on the sustainable returns.Practical implicationsFirst, sustainability is essential for the long-term stakeholders’ wealth maximization under governments’ policy uncertainty such as constrained resources, demographic and climate-change-policy, societal expectations, public-policies, regulatory structure. Second, EPU creates new opportunities and risks for sustainable firms and sustainable investing.Originality/valueThe study is novel in which the authors present the effects of uncertainty on socially responsible investing.

Introduction: Uncertainty plays an important role on economic stability and macroeconomic variables. Economic agents postpone decisions about investment and consumption in periods in which uncertainty is high. This situation affects economic growth negatively. Recently, uncertainty has focused on policy uncertainty. At this point, economic policy uncertainty (EPU) comes to the forefront. EPU is defined as conception that economic agents do not forecast consequences of economic policies adopted by policy makers and future economic policies. In terms of developing countries, statements presented by policy makers in the United States especially may appear as a source of uncertainty in developing economies. Aim: Therefore, the aim of this study is to analyze the effects of US EPU on macroeconomic variables for Turkey and Brazil, Russia, India, China and South Africa for periods in which global risk perception is low and high. Method: The authors used monthly data from January 1998 to December 2018. For this purpose, the authors used Threshold VAR. VIX index takes in consideration as global risk perception. The authors used US EPU index proposed by Baker’s vd. (2016) in order to measure EPU in the United States. Besides, the authors used macroeconomic variables such as industrial production index, inflation and exchange rate. Findings: As is seen from the results of the analysis, for Turkey’s economy the macroeconomic variables significantly and strongly respond to the changes in the EPU index during the periods in which global risk perception is low; nonetheless, the so-called responses weaken due to the adopted policy of “wait and watch” by investors during the periods in which global risk perception is high.

Policy uncertainty and peer effects: Evidence from corporate investment in China