The impacts of global economic policy uncertainty on stock market returns in regime switching environment

Evidence from sectoral perspectives

Mohammad Enamul Hoque, Mohd Azlan Shah Zaidi

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This study contributes in building emerging literature by investigating the impacts of global economic policy uncertainty on Malaysian sectoral stock performance. This study models sectoral stock returns as time-varying transition probability Markovian processes and employs two-stage Markov-switching model for findings impacts of global economic policy uncertainty on sectoral stock returns in regime switching environment. The empirical results reveal that linear framework unable to detect the effects global economic policy uncertainty, and the Markov-switching model exhibits significant effects of global economic policy uncertainty on all sectoral stock returns excluding technology sector in Malaysia stock market. The findings also expose that the effects of global economic policy uncertainty vary across regime states, sectors, and nature of effects, where the negative effects of global economic policy uncertainty dominate over positive effects. The global economic policy uncertainty exhibits greater impacts on stock returns in high-volatility regime. Thus, the findings confirm the existence of asymmetric, nonlinear, nonmonotonic, and state-dependent relationship between global economic policy uncertainty and sectoral stock returns in Malaysia. Therefore, the overall empirical findings can be applied in asset pricing and investment decision-making purposes. The findings also suggest that global economic policy uncertainty can be a systemic risk factor and predictor of stock market returns.

Original languageEnglish
Pages (from-to)991-1016
Number of pages26
JournalInternational Journal of Finance and Economics
Volume24
Issue number2
DOIs
Publication statusPublished - 1 Apr 2019

Fingerprint

Stock market returns
Economic policy
Policy uncertainty
Regime switching
Stock returns
Markov switching model
Malaysia
Predictors
Asset pricing
Stock performance
Time-varying
Systemic risk
Investment decision-making
Pricing decisions
Empirical results
Stock market
Risk factors
Transition probability

Keywords

  • emerging stock market
  • global economic policy uncertainty
  • Malaysia
  • Markov-switching process
  • sectoral stock returns

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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