Economic policy uncertainty and stock returns among OPEC members : evidence from feasible quasi-generalized least squares

We examine the predictive ability of economic policy uncertainty on stock returns of selected OPEC countries. In order to deal with certain statistical properties of the predictors, which include serial correlation, persistence, conditional heteroskedasticity, and endogeneity effects, wse utilize the Feasible Quasi-Generalized Least Squares (FQGLS) estimator in order to obtain accurate forecast estimates. As a precondition for forecast analysis, we conduct the predictability test, which shows that economic policy uncertainty is significant only for five countries, namely Kuwait, Nigeria, Saudi Arabia, United Arab Emirates, and Venezuela. Hence, we proceed with the main forecast analysis for only this set of countries. Our results are twofold. We first account for asymmetries in forecasting stock returns by comparing the forecast performance of the symmetric economic policy uncertainty-based predictive model with its asymmetric variant. On the other hand, we compare the performance of the best model from above with the standard ARFIMA model using an alternative forecast test. In both cases, we find that the asymmetric model yields the most accurate forecast returns for stock returns of the five countries. In essence, neglecting the role of asymmetries in forecasting stock returns can lead to bias results. Our findings are not only robust to different sample sizes (i.e., 50%, and 75%) and different forecast horizons (4, 8, and 12 months) but have important policy implications for policymakers and potential investors.