# A global economic policy uncertainty index from principal component analysis

## TL;DR

This paper develops a global economic policy uncertainty index using principal component analysis, which effectively captures global uncertainty and relates positively to financial market volatility and correlation.

## Contribution

It introduces a PCA-based global economic policy uncertainty index that outperforms existing measures in reflecting market volatility and correlation.

## Key findings

- PCA-based index correlates with market volatility and correlation.
- The index is a good proxy for global economic policy uncertainty.
- It performs slightly better than GDP-weighted indices.

## Abstract

This paper constructs a global economic policy uncertainty index through the principal component analysis of the economic policy uncertainty indices for twenty primary economies around the world. We find that the PCA-based global economic policy uncertainty index is a good proxy for the economic policy uncertainty on a global scale, which is quite consistent with the GDP-weighted global economic policy uncertainty index. The PCA-based economic policy uncertainty index is found to be positively related with the volatility and correlation of the global financial market, which indicates that the stocks are more volatile and correlated when the global economic policy uncertainty is higher. The PCA-based global economic policy uncertainty index performs slightly better because the relationship between the PCA-based uncertainty and market volatility and correlation is more significant.