Economic Policy Uncertainty and Long-Run Stock Market Volatility and Correlation

We use economic policy uncertainty (EPU) shocks in combination with the mixed data sampling (MIDAS) approach to investigate long-run stock market variances and correlations, primarily for the US and the UK. The US long-run stock market variance depends significantly on US EPU shocks but not on UK EPU shocks, while the UK long-run stock market variance depends significantly on both US and UK EPU shocks. The long-run correlation depends positively on the US EPU shocks. The dependence is asymmetrical, with only positive shocks (increasing uncertainty) being important. Out-of-sample analysis shows that models with the US EPU shocks perform well in predicting correlation. We further analyze categorical EPU shocks and several global stock markets