On the Different Impact of Local and National Sources of Policy Uncertainty on Sectoral Stock Volatility

We examine the impact of state-level and national-level policy uncertainty (EPU) on stock volatility in 17 different sectors. Based on EPU in 46 U.S. states, we build a local-based index of uncertainty by applying principal component analysis. We compare the impact of this measure with national uncertainty using a quantile regression design. The results provide evidence that banks are impacted by both sources. That is, central bank interventions matter on the national level and the lending behavior of clients is important on the local level. Moreover, consumer-related sectors like beverages, personal goods and transportation stocks react to local rather than national uncertainty. In contrast, the healthcare and defense sectors respond only to national uncertainty shocks. Finally, medical, technology, electricity and chemical stocks are not affected by any of the two sources as the demand in these industries is usually less elastic to shocks. The effects are, on average, more pronounced at the 75% quantile, indicating that the impacts are larger in times of high volatility