US Policy Uncertainty and Stock Market Nexus Revisited through Dynamic ARDL Simulation and Threshold Modelling

Muhammad Asif Khan; Masood Ahmed; József Popp; Judit Oláh

doi:10.3390/math8112073

journal article Open Access Nov 20, 2020

US Policy Uncertainty and Stock Market Nexus Revisited through Dynamic ARDL Simulation and Threshold Modelling

Muhammad Asif Khan

Masood Ahmed

József Popp

Judit Oláh

Mathematics Vol. 8 No. 11 pp. 2073 · MDPI AG

View at Publisher Save 10.3390/math8112073

Abstract

Since the introduction of the measure of economic policy uncertainty, businesses, policymakers, and academic scholars closely monitor its momentum due to expected economic implications. The US is the world’s top-ranked equity market by size, and prior literature on policy uncertainty and stock prices for the US is conflicting. In this study, we reexamine the policy uncertainty and stock price nexus from the US perspective, using a novel dynamically simulated autoregressive distributed lag setting introduced in 2018, which appears superior to traditional models. The empirical findings document a negative response of stock prices to 10% positive/negative shock in policy uncertainty in the short-run, while in the long-run, an increase in policy uncertainty by 10% reduces the stock prices, which increases in response to a decrease with the same magnitude. Moreover, we empirically identified two significant thresholds: (1) policy score of 4.89 (original score 132.39), which negatively explain stock prices with high magnitude, and (2) policy score 4.48 (original score 87.98), which explains stock prices negatively with a relatively low magnitude, and interestingly, policy changes below the second threshold become irrelevant to explain stock prices in the United States. It is worth noting that all indices are not equally exposed to unfavorable policy changes. The overall findings are robust to the alternative measures of policy uncertainty and stock prices and offer useful policy input. The limitations of the study and future line of research are also highlighted. All in all, the policy uncertainty is an indicator that shall remain ever-important due to its nature and implication on the various sectors of the economy (the equity market in particular).

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Details

Published: Nov 20, 2020
Vol/Issue: 8(11)
Pages: 2073
License: View

Authors

M

Muhammad Asif Khan

Faculty of Management Sciences, University of Kotli, Azad Jammu and Kashmir, Kotli 11100, Pakistan

M

Masood Ahmed

Faculty of Management Sciences, University of Kotli, Azad Jammu and Kashmir, Kotli 11100, Pakistan; Lee Kuan Yew School of Public Policy, National University of Singapore, Kent Ridge, 469C Bukit Timah Road, Singapore 259772, Singapore

J

József Popp

Faculty of Economics and Social Sciences, Szent István University, 2100 Gödölő, Hungary; TRADE Research Entity, Faculty of Economic and Management Sciences, North-West University, Vanderbijlpark 1900, South Africa

J

Judit Oláh

TRADE Research Entity, Faculty of Economic and Management Sciences, North-West University, Vanderbijlpark 1900, South Africa; Faculty of Economics and Business, University of Debrecen, 4032 Debrecen, Hungary

Cite This Article

Muhammad Asif Khan, Masood Ahmed, József Popp, et al. (2020). US Policy Uncertainty and Stock Market Nexus Revisited through Dynamic ARDL Simulation and Threshold Modelling. Mathematics, 8(11), 2073. https://doi.org/10.3390/math8112073

US Policy Uncertainty and Stock Market Nexus Revisited through Dynamic ARDL Simulation and Threshold Modelling

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