The Relationship between the Stock Markets and Economic Policy Uncertainty: An Application on Some Developed and Developing Countries

Abstract

Factors such as war, crisis, and political election occurring in the global system create uncertainties in national and international markets. Emerging uncertainties have important effects on the decisions to be taken by countries regarding macroeconomic aggregates and may lead countries to uncertainty in terms of economic policy. In an environment of uncertainty, investors' confidence in the economy may decrease and stock markets may be adversely affected by this situation. In this study, it is aimed to examine the relationship between the economic policy uncertainty and stock markets. Accordingly, a study was conducted using panel causality analysis and monthly data covering the period from August 2010 to February 2022 in some developed and developing countries (USA, Australia, Belgium, Brazil, China, India, Hong Kong, England, Ireland, Japan, Canada, Mexico, Pakistan, Russia, Chile). Panel causality analysis, which considers cross-sectional dependence and heterogeneity, shows that economic policy uncertainty affects the stock market in Japan, the stock market affects the economic policy uncertainty in the USA, Australia, Brazil, England, Ireland, Mexico, Pakistan, and both sectors affect each other in Canada.