Global Cyber Policy Developments for Cyber Security and Financial Market Stability : A Quantitative Investigation

The growing scope and magnitude of cyber incidents have stimulated worldwide policy discussions on the regulatory framework for systemic cyber risk in the digital age. This study evaluates the effectiveness of cyber policies in mitigating cyber risks and maintaining financial market stability. By constructing a news-based Cyber Policy Index (CyPI) that quantifies the global policy development in the area of cyber security, we first use the wavelet approach to analyze the interaction between CyPI and cyber attacks in the time-frequency domain. Quantile causality and regression are then applied to explore the non-linear relationship between cyber policy and stock market responsiveness. The finding of this study provides fruitful insights. 1) The increased number of cyber-attacks are short-term drives of policy developments, whilst the impact of those policies takes longer to be reflected. 2) The existing policy framework reduces the frequency of cyber attacks, whereas mitigating the damages from large-scale malicious acts remains challenging. 3) Cyber policy tends to reduce the abnormal returns of certain stocks, especially in the data- and technology-sensitive sectors. 4) Yet the risk-mitigating effect appears inconsistent across sectors; current regulatory tools show their potential in reducing the stock market risks in the higher quantiles