The significance of uncertainty in policies related to economic decisions is higher than ever before in today’s interconnected world. This study contributes to existing research by reviewing the literature on the impact of economic policy uncertainty on corporations and economies worldwide. We show the importance of measuring and tracking uncertainty by highlighting its influence on financial decisions. We examine the growing number of studies that use the economic policy uncertainty index (EPU) of Baker, Bloom, and Davis (2016) as a key factor in measuring uncertainty. We then review the impact of EPU on financial markets, macro and micro level, stock markets, corporate behavior, and risk management. Then, we document the asymmetric policy responses of economic uncertainty. Overall, policy uncertainty has a significant impact on firm financial policies as well as on consumer spending. Specifically, corporations act more conservatively during times of high uncertainty, thereby slowing investments in production and employment. In addition to the local effect of EPU, it spills over to other countries.

Economic policy uncertainty: A literature review

This study investigates the dynamic connectedness between stock indices and the effect of economic policy uncertainty (EPU) in eight countries where COVID-19 was most widespread (China, Italy, France, Germany, Spain, Russia, the US, and the UK) by implementing the time-varying VAR (TVP-VAR) model for daily data over the period spanning from 01/01/2015 to 05/18/2020. Results showed that stock markets were highly connected during the entire period, but the dynamic spillovers reached unprecedented heights during the COVID-19 pandemic in the first quarter of 2020. Moreover, we found that the European stock markets (except Italy) transmitted more spillovers to all other stock markets than they received, primarily during the COVID-19 outbreak. Further analysis using a nonlinear framework showed that the dynamic connectedness was more pronounced for negative than for positive returns. Also, findings showed that the direction of the EPU effect on net connectedness changed during the pandemic onset, indicating that information spillovers from a given market may signal either good or bad news for other markets, depending on the prevailing economic situation. These results have important implications for individual investors, portfolio managers, policymakers, investment banks, and central banks.

https://link.springer.com/content/pdf/10.1186/s40854-021-00227-3.pdf

Dynamic connectedness between stock markets in the presence of the COVID-19 pandemic: does economic policy uncertainty matter?

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We explore how to invest in the Chinese mutual fund market based on the Bayesian method. We extend the portfolio construction method by integrating additional information, such as nonbenchmark asse...

Libing Fang

Papers

The effect of economic policy uncertainty on the long-term correlation between U.S. stock and bond markets

Forecasting gold futures market volatility using macroeconomic variables in the United States

Investing in Mutual Funds Using the Bayesian Framework: Evidence from China