Empirical Analysis of Economic Policy Uncertainty and Stock Returns in Asian Markets

This chapter tests the market risk and economic policy uncertainty (EPU) of five Asian stock market returns and finds positive and significant intertemporal relations between excess stock returns and conditional volatility/downside risk. The results support positive risk-return relations across five Asian markets after controlling for the lagged dividend yield and the change in EPU ( <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink" altimg="si219.gif"> <mml:mrow> <mml:mo>Δ</mml:mo> </mml:mrow> </mml:math>EPU). The evidence strongly indicates that excess stock returns are negatively correlated with the <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink" altimg="si220.gif"> <mml:mrow/> <mml:mrow> <mml:mo>Δ</mml:mo> </mml:mrow> </mml:math>EPUs. This finding holds true not only for the domestic market but also for external sources. The negative effect of <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink" altimg="si221.gif"> <mml:mrow> <mml:mo>Δ</mml:mo> </mml:mrow> </mml:math>EPU is more profound from the US and global markets as compared with those from the Europe, Japanese, and domestic markets and suggests that a pathway to forming an optimal strategy for portfolio risk management depends on developing an effective hedging strategy against the impact of <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink" altimg="si222.gif"> <mml:mrow> <mml:mo>Δ</mml:mo> </mml:mrow> </mml:math>EPUs from US/global markets.