How does economic policy uncertainty comove with stock markets: New evidence from symmetric thermal optimal path method

TL;DR

This paper investigates the dynamic relationship between economic policy uncertainty and stock markets across different countries using the symmetric thermal optimal path method, revealing distinct interaction patterns and the impact of extreme events.

Contribution

It introduces the symmetric thermal optimal path method to analyze the time-varying comovement between policy uncertainty and stock markets across emerging and developed economies.

Findings

Economic policy uncertainty influences China's stock market.

Stock markets in the UK and US lead the policy uncertainty.

Extreme events significantly alter lead-lag relationships.

Abstract

We revisit the dynamic relationship between domestic economic policy uncertainty and stock markets using the symmetric thermal optimal path (TOPS) method. We observe different interaction patterns in emerging and developed markets. Economic policy uncertainty drives the stock market in China, while stock markets play a leading role in the UK and the US. Meanwhile, the lead-lag relationship of the three countries reacts significantly to extreme events. Our findings have important implications for investors and policy makers.