The impact of economic policy uncertainty on stock types while considering the economic cycle. A quantile regression approach

Abstract

Purpose This study aims to analyse the effects of Economic Policy Uncertainty (EPU) on the return of growth/value and small/large-cap stocks during expansionary and recessionary periods across a conditional distribution. Design/methodology/approach The authors selected a sample covering the period between 01/1995–05/2021. Quantile regressions were applied to the EPU and Russell indices. Business cycles were established following the NBER. Findings The results show that EPU has a negative effect on stocks with the intensity of the effect depending on the stock's profile. Small-cap and growth stocks were found to be most sensitive to EPU, especially during recessions. The negative effect is moderated by the economic cycle but is progressively diluted at the lower tail of the stock return distribution. Practical implications The findings shed more light on investment strategies for growth/value investors that pursue opportunities arising from a changing economic cycle. Originality/value This study makes the following contributions: (1) explores the impact of EPU on the return of different stocks across a conditional distribution, and (2) provides evidence on how the economic cycle influences EPU impact on growth/value stocks and small/large stocks.