SpringerLink
Log in

The Impact of Directional Global Economic Policy Uncertainty on Indian Stock Market Volatility: New Evidence

  • Original Research
  • Published:
Asia-Pacific Financial Markets Aims and scope Submit manuscript

Abstract

This paper examines the effect of economic policy uncertainty (EPU) on the Indian capital market using the generalized autoregressive conditional heteroscedastic mixed data sampling (GARCH-MIDAS) approach. This study also disintegrates the Global EPU (GEPU) on its components using identity functions such as up, down, and composite parts dependent on the adjustment in the heading of the EPU and GEPU and tests the linkages among these parameters and the Indian securities exchange instability. Our empirical study shows that GEPU positively and significantly impacts the Indian capital market's volatility. That indicates that the Indian capital exchange volatility will also be unstable when the global economic policy uncertainty is higher. Further, based on the dynamic directions of EPU and GEPU, our results show that, in diverse situations, directional GEPU may present differently in predicting the uncertainty in the Indian capital market. This is primarily so when EPU and GEPU climb in the same period when our approach can obtain more powerful prediction precision.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Subscribe and save

Springer+ Basic
EUR 32.99 /Month
  • Get 10 units per month
  • Download Article/Chapter or Ebook
  • 1 Unit = 1 Article or 1 Chapter
  • Cancel anytime
Subscribe now

Buy Now

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Source: Generated by authors

Fig. 2

Source: Generated by authors

Fig. 3

Source: Generated by authors

Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10

Similar content being viewed by others

Data Availability

The data supporting this study's findings are available on request from the corresponding author.

References

  • Aizenman, J., & Marion, N. (1999). Volatility and investment: Interpreting evidence from develo** countries. Economica, 66(262), 157–1179.

    Article  Google Scholar 

  • Arouri, M., Estay, C., Rault, C., & Roubaud, D. (2016). Economic policy uncertainty and stock markets: Long-run evidence from the U.S. Finance Research Letters, 18, 136–141.

    Article  Google Scholar 

  • Asgharian, H., Christiansen, C., & Hou, A. J. (2018). Economic policy uncertainty and long- run stock market volatility and correlation. https://ssrn.com/abstract1⁄43146924

  • Asgharian, H., Hou, A. J., & Javed, F. (2013). The importance of the macroeconomic variables in forecasting stock return variance: A GARCH-MIDAS approach. Journal of Forecasting, 32(7), 600–612.

    Article  Google Scholar 

  • Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636.

    Article  Google Scholar 

  • Baum, C. F., Caglayan, M., & Talavera, O. (2010). On the sensitivity of firms’ investment to cash flow and uncertainty. Oxford Economic Papers, 62(2), 286–306.

    Article  Google Scholar 

  • Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The Quarterly Journal of Economics, 98(1), 85–106.

    Article  Google Scholar 

  • Bhagat, S., & Bolton, B. (2014). Financial crisis and bank executive incentive compensation. Journal of Corporate Finance, 25, 313–341.

    Article  Google Scholar 

  • Brogaard, J., & Detzel, A. (2015). The asset-pricing implications of government economic policy uncertainty. Management Science, 61(1), 3–18.

    Article  Google Scholar 

  • Caggiano, G., Castelnuovo, E., & Figueres, J. M. (2020). Economic policy uncertainty spillovers in booms and busts. Oxford Bulletin of Economics and Statistics, 82(1), 125–155.

    Article  Google Scholar 

  • Chaudhuri, K., & Koo, K. (2001). Volatility of stock returns: Importance of economic fundamentals. Economic and Political Weekly, 36, 3852–3856.

    Google Scholar 

  • Chen, L., Du, Z., & Hu, Z. (2020). Impact of economic policy uncertainty on exchange rate volatility of China. Finance Research Letters, 32, 101266.

    Article  Google Scholar 

  • Chiang, T. C. (2019a). Economic policy uncertainty, risk and stock returns: Evidence from G7 stock markets. Finance Research Letters, 29(C), 41–49.

    Article  Google Scholar 

  • Chiang, T. C. (2019b), Empirical analysis of economic policy uncertainty and stock returns in asian markets. In Advances in Pacific basin business, economics and finance (Vol. 7, pp. 63–87). Emerald Publishing Limited.

  • Colombo, V. (2013). Economic policy uncertainty in the US: Does it matter for the Euro area? Economics Letters, 121(1), 39–42.

    Article  Google Scholar 

  • Conrad, C., & Loch, K. (2015). Anticipating long-term stock market volatility. Journal of Applied Econometrics, 30(7), 1090–1114.

    Article  Google Scholar 

  • Engle, R. F., Ghysels, E., & Sohn, B. (2013). Stock market volatility and macroeconomic fundamentals. Review of Economics and Statistics, 95(3), 776–797.

    Article  Google Scholar 

  • Engle, R. F., & Rangel, J. G. (2008). The spline-GARCH model for low-frequency volatility and its global macroeconomic causes. Rev. Financ. Stud., 21(3), 1187–1222.

    Article  Google Scholar 

  • Fang, L., Chen, B., Yu, H., & Qian, Y. (2018). The importance of global economic policy uncertainty in predicting gold futures market volatility: A GARCH-MIDAS approach. Journal of Futures Markets, 38(3), 413–422.

    Article  Google Scholar 

  • Friedman, M. (1968). Dollars and deficits: Inflation, monetary policy and the balance of payments (No. 332.4/F91d).

  • Girardin, E., & Joyeux, R. (2013). Macro fundamentals as a source of stock market volatility in China: A GARCH-MIDAS approach. Economic Modelling, 34, 59–68.

    Article  Google Scholar 

  • Gulen, H., & Ion, M. (2016). Policy uncertainty and corporate investment. The Review of Financial Studies, 29(3), 523–564.

    Google Scholar 

  • Hoque, M. E., & Zaidi, M. A. S. (2020). Global and country-specific geopolitical risk uncertainty and stock return of fragile emerging economies. Borsa Istanbul Review, 20(3), 197–213.

    Article  Google Scholar 

  • Jones, P. M., & Olson, E. (2013). The time-varying correlation between uncertainty, output, and inflation: Evidence from a DCC-GARCH model. Economics Letters, 118(1), 33–37.

    Article  Google Scholar 

  • Kearney, A. A., & Lombra, R. E. (2004). Stock market volatility, the news, and monetary policy. Journal of Economics and Finance, 28(2), 252–259. https://doi.org/10.1007/bf02761615

    Article  Google Scholar 

  • Li, R., Li, S., Yuan, D., & Yu, K. (2020a). Does economic policy uncertainty in the US influence stock markets in China and India? Time-frequency evidence. Applied Economics, 52, 1–17.

    Article  Google Scholar 

  • Li, T., Ma, F., Zhang, X., & Zhang, Y. (2019a). Economic policy uncertainty and the Chinese stock market volatility: Novel evidence. Economic Modelling. https://doi.org/10.1016/j.econmod.2019.07.002

    Article  Google Scholar 

  • Li, T., Ma, F., Zhang, X., & Zhang, Y. (2020b). Economic policy uncertainty and the Chinese stock market volatility: Novel evidence. Economic Modelling, 87, 24–33.

    Article  Google Scholar 

  • Li, X. L., Balcilar, M., Gupta, R., & Chang, T. (2016). The causal relationship between economic policy uncertainty and stock returns in China and India: Evidence from a bootstrap rolling window approach. Emerging Markets Finance and Trade, 52(3), 674–689.

    Article  Google Scholar 

  • Li, Y., Ma, F., Zhang, Y., & **ao, Z. (2019b). Economic policy uncertainty and the Chinese stock market volatility: New evidence. Applied Economics, 51(49), 5398–5410.

    Article  Google Scholar 

  • Liu, L., & Zhang, T. (2015). Economic policy uncertainty and stock market volatility. Finance Research Letters, 15, 99–105. https://doi.org/10.1016/j.frl.2015.08.009

    Article  Google Scholar 

  • Mishra, A. K., Agrawal, S., & Patwa, J. A. (2022). Return and volatility spillover between India and leading Asian and global equity markets: An empirical analysis. Journal of Economics, Finance and Administrative Science, 27(54), 294–312. https://doi.org/10.1108/JEFAS-06-2021-0082

    Article  Google Scholar 

  • Mishra, A. K., Theertha, A., Amoncar, I. M., & Manogna, R. L. (2023). Equity market integration in emerging economies: A network visualization approach. Journal of Economic Studies, 50(4), 696–717. https://doi.org/10.1108/JES-07-2021-0343

    Article  Google Scholar 

  • Pan, Z., Wang, Y., Wu, C., & Yin, L. (2017). Oil price volatility and macroeconomic fundamentals: A regime switching GARCH-MIDAS model. J. Empirical Finance., 43, 130–142.

    Article  Google Scholar 

  • Panousi, V., & Papanikolaou, D. (2012). Investment, idiosyncratic risk, and ownership. The Journal of Finance, 67(3), 1113–1148.

    Article  Google Scholar 

  • Pastor, L., & Veronesi, P. (2012). Uncertainty about government policy and stock prices. The Journal of Finance, 67(4), 1219–1264.

    Article  Google Scholar 

  • Paule-Vianez, J., Gómez-Martínez, R., & Prado-Román, C. (2020a). Effect of economic and monetary policy uncertainty on stock markets. Evidence on return, volatility and liquidity. Economics Bulletin, 40(2), 1261–1271.

    Google Scholar 

  • Paule-Vianez, J., Prado-Román, C., & Gómez-Martínez, R. (2020b). Economic policy uncertainty and Bitcoin. Is Bitcoin a safe-haven asset? European Journal of Management and Business Economics., 29, 347–363.

    Article  Google Scholar 

  • Pindyck, R. S. (1990). Irreversibility, uncertainty, and investment (No. w3307). National Bureau of Economic Research.

  • Prüser, J., & Schlösser, A. (2020). The effects of economic policy uncertainty on European economies: Evidence from a TVP-FAVAR. Empirical Economics, 58(6), 2889–2910.

    Article  Google Scholar 

  • Rodrik, D. (1991). Policy uncertainty and private investment in develo** countries. Journal of Development Economics, 36(2), 229–242.

    Article  Google Scholar 

  • Wang, Y., Ma, F., Wei, Y., & Wu, C. (2016). Forecasting realized volatility in a changing world: A dynamic model averaging approach. Journal of Banking and Finance, 64, 136–149.

    Article  Google Scholar 

  • Wei, Y., Liu, J., Lai, X., & Hu, Y. (2017). Which determinant is the most informative in forecasting crude oil market volatility: Fundamental, speculation, or uncertainty? Energy Economics, 68, 141–150.

    Article  Google Scholar 

  • Yu, H., Fang, L., & Sun, W. (2018). Forecasting performance of global economic policy uncertainty for volatility of Chinese stock market. Physica a: Statistical Mechanics and Its Applications, 505, 931–940.

    Article  Google Scholar 

  • Zhang, D., Lei, L., Ji, Q., & Kutan, A. M. (2019). Economic policy uncertainty in the US and China and their impact on global markets. Economic Modelling, 79, 47–56. https://doi.org/10.1016/j.econmod.2018.09.028

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics and Finance, BITS, Pilani – K K Birla Goa Campus, Zuarinagar, Goa, 403726, India

    Aswini Kumar Mishra

  2. BITS, Pilani- K K Birla Goa Campus, Zuarinagar, Goa, 403726, India

    Anand Theertha Nakhate

  3. National Law University Odisha, Cuttack, Odisha, India

    Bibhu Prasad Kar

  4. Indian Institute of Management Bangalore, Bengaluru, India

    Abinash Singh

  5. J.P Morgan Chase, Mumbai, India

    Yash Bagra

Authors
  1. Aswini Kumar Mishra
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Anand Theertha Nakhate
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Yash Bagra
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Abinash Singh
    View author publications

    You can also search for this author in PubMed Google Scholar

  5. Bibhu Prasad Kar
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Aswini Kumar Mishra.

Ethics declarations

Conflict of interest

There is no conflict of interest among the authors for this piece of research work.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Springer Nature or its licensor (e.g. a society or other partner) holds exclusive rights to this article under a publishing agreement with the author(s) or other rightsholder(s); author self-archiving of the accepted manuscript version of this article is solely governed by the terms of such publishing agreement and applicable law.

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Mishra, A.K., Nakhate, A.T., Bagra, Y. et al. The Impact of Directional Global Economic Policy Uncertainty on Indian Stock Market Volatility: New Evidence. Asia-Pac Financ Markets (2023). https://doi.org/10.1007/s10690-023-09421-y

Download citation

  • Accepted:

  • Published:

  • DOI: https://doi.org/10.1007/s10690-023-09421-y

Keywords

JEL Classification

Search

Navigation