Examining the Relationship Between National Economic Policy Uncertainty and Stock Market Indices: An Empirical Analysis for Selected European Countries
Kübra Saka IlgınThe literature on economics and finance accepts uncertainty as an important factor affecting investor behavior. As a reflection of what is expected from countries’ economies, economic policy uncertainty indices were developed based on the USA economy and then were diversified for different countries and formed based on the news. Economic policy uncertainty can be a guide for stock market investors in estimating stock returns, in line with the effects cash flows have on stock returns. The aim of this study is to investigate the relationship between economic policy uncertainty and stock market indices. The study investigates the relationship between the data Europe’s leading stock markets indices and these countries’ national economic policy uncertainty indices within the scope of panel data analyses using the panel autoregressive distributed lag model/pooled mean group estimator (ARDL/PMG). The five European countries examined in this direction are; Germany, Italy, England, France, and Spain. A panel data-set was created using these countries’ national economic policy uncertainty indices for the December 2002-October 2021 period and benchmark stock market indices’ closing prices. According to the research results, significant short-term and long-term negative relationships have been determined to exist between the indices of Europe’s leading stock markets and the respective economic policy uncertainty indices for the whole panel. The short-term correlation coefficients per country; show a significant negative relationship to exist between economic policy uncertainty and stock market index prices for all examined countries. In line with the findings obtained from the study; the national economic policy uncertainty indices in European countries can be said to be leading indicators for guiding investors in estimating stock market returns.
Ulusal Ekonomik Politika Belirsizliği ile Borsa Endeksleri Arasındaki İlişkinin İncelenmesi: Seçilmiş Avrupa Ülkeleri için Ampirik Bir Analiz
Kübra Saka IlgınEkonomi ve finans literatüründe belirsizlik, yatırımcı davranışlarını etkileyen önemli bir faktör olarak kabul edilmektedir. Amerikan ekonomisi temelli olarak geliştirilen ve daha sonra farklı ülkeler için de çeşitlendirilen, haberlere dayalı olarak oluşturulan ekonomik politika belirsizliği endeksleri, ülke ekonomileri ile ilgili beklentileri yansıtmaktadır. Ekonomik politika belirsizliği, nakit akışlarının hisse senedi getirileri üzerindeki etkisi doğrultusunda, borsa yatırımcıları için borsa getirilerinin tahmininde yol gösterici olabilmektedir. Çalışmanın amacı, ekonomik politika belirsizliği ile borsa endeksleri arasındaki ilişkinin araştırılmasıdır. Bu doğrultuda çalışmada, Avrupa’nın önde gelen borsalarının gösterge endeks verileri ile bu ülkelerin ulusal ekonomik politika belirsizlik endeksleri arasındaki ilişki, panel veri analizi kapsamında panel gecikmesi dağıtılmış otoregresif model/havuzlanmış ortalama grup tahmincisi (ARDL/PMG) kullanılarak araştırılmıştır. Bu doğrultuda incelenen beş Avrupa ülkesi; Almanya, İtalya, İngiltere, Fransa ve İspanya için 2002 Aralık- 2021 Ekim dönemine ait ulusal ekonomik politika belirsizlik endeksleri ile ülkelerin gösterge borsa endeks kapanış fiyatları kullanılarak panel veri seti oluşturulmuştur. Araştırma sonuçlarına göre, panelin bütününde Avrupa’nın önde gelen borsa endeksleri ile ekonomik politika belirsizlik endeksleri arasında kısa ve uzun dönemde anlamlı bir negatif ilişki olduğu tespit edilmiştir. Ülkelere göre kısa dönemli ilişki katsayıları da; incelenen tüm ülkelerde ekonomik politika belirsizliği ile borsa endeks fiyatları arasında anlamlı ve negatif ilişki olduğunu göstermiştir. Çalışmadan elde edilen bulgular doğrultusunda; Avrupa ülkelerinde ulusal ekonomik politika belirsizlik endekslerinin, borsa getirilerinin tahmininde yatırımcılara yol gösterici nitelikte öncü bir gösterge olduğu ifade edilebilir.
According to economic theory, firms postpone recruitment and investment, consumers postpone their durable goods purchases, and economic activities decrease in periods of increased uncertainty. In periods when uncertainty decreases after a period of high uncertainty, economic activity improves as it begins to adjust to the suppressed demand companies and consumers have for hiring, investments and consumption.
Baker, Bloom and Davis (2013) developed a new economic policy uncertainty (EPU) index based on the frequency with which keywords related to economic policy uncertainty are published in newspaper articles. This index has contributed to a better analysis of the potential effects from uncertainty by comprehensively covering the sources of uncertainty. EPU indices aim to predict the uncertainties about who will make the economic policy decisions, which economic policy actions will be taken, and when the economic effects of policy actions and the economic consequences of non-economic political issues.
The main purpose of this study is to evaluate the effect the economic policy uncertainty indices (EPUs), have on European countries’ stock market indices as a representation of these countries’ national economic policy uncertainties. In addition, determining the relationship between countries’ economic policy uncertainty and stock market indices and having policymakers develop policies that are resistant to uncertainties will benefit financial market participants in terms of portfolio diversification.
This study has investigated the relationship between European countries’ national economic policy uncertainty indices and their relative benchmark stock market index prices using the panel autoregressive distributed lag/pooled mean group (ARDL/PMG) estimator within the scope of a panel data analysis. Germany, Italy, England, France, and Spain are the five European countries that have been examined in this direction a panel data-set was created using these countries’ respective national economic policy uncertainty indices and benchmark stock market indices for the 2002 December-October 2021 period. The basic method used in the study is the panel ARDL analysis, which examines the short- and longterm relationships between panel data series. However, the study needs to examine the homogeneity assumptions and cross-section dependencies of the panel data series to be used in the analysis before testing this relationship. The study uses the first-generation of panel unit root tests for the stationarity analysis of the series without cross-sectional dependence and the second generation of unit root tests for the stationarity analysis of series with cross-section dependence. Therefore, in order to continue the analysis with the correct unit root test, the study needs to test the cross-sectional dependence between the series. The homogeneity, cross-section dependency, unit root, and cointegration tests that will be performed with the panel ARDL analysis constitute the econometric method of the study. The study uses the second generation of unit root tests and panel ARDL/PMG estimator in the line with this method.
This research presents empirical results that support economic policy uncertainty in European countries to impact the indices of Europe’s leading stock markets. In the line with the study’s findings, short- and long-term significant negative relationships have been determined to exist between European countries’ national economic policy uncertainty and their stock market indices. The study’s findings have important implications for policymakers, financial market participants, asset managers, and international investors and reveal the need for policymakers to develop policies that are resistant to global uncertainties and shocks. Financial market participants and asset managers should monitor changes in economic policy uncertainty as well as the direction of these changes and position their portfolios in accordance with the changes in economic policy uncertainty that may have short-term and long-term effects on stocks. Meanwhile, the findings provide international investors with important information that will allow them to be able to obtain higher returns from their financial assets and diversify their portfolios with suitable assets.
