Journal of Public Administration, Finance and Law (Dec 2020)
ECONOMIC POLICY UNCERNTAINTY AND CAPITAL MARKET VOLATILITY
Abstract
Economic policy uncertainty can influence consumer behaviour, investor’s perception and the entire economic environment of a country. This paper revisits the relationship between economic policy uncertainty and capital market volatility for emerging and developed economies. We use wavelet-based methodologies to test the influence of uncertain economic policies on the evolution of the capital markets for two developed capital markets between 2000 and 2016. In our analysis, we use the News Implied Volatility Index – NVIX as proxy for uncertainty depicted in news and media. Our result indicate that there is a strong relationship between news that appear in the media and the evolution of developed capital markets, and the effects of economic uncertainty are present in both crisis and non-crisis periods. Furthermore, we find that the effect of economic uncertainty tends to exert a higher influence on long-term development of the capital market, rather than short-term development. Our empirical results emphasize that investors react to inadequate economic policy measures in developed economies, therefore ensuring a predictable and stable economic environment should one the main focuses of policy makers in types of economies. Uncertainty can influence not only economic growth, but also capital market development
