Skip to main content
Top

Hint

Swipe to navigate through the articles of this issue

Published in: Journal of Economics and Finance 4/2020

14-04-2020

Economic policy uncertainty spillover effects on sectoral equity returns of New Zealand

Authors: Faruk Balli, Hatice O. Balli, Mudassar Hasan, Russell Gregory-Allen

Published in: Journal of Economics and Finance | Issue 4/2020

Login to get access
share
SHARE

Abstract

In this paper, we introduce a weekly index of economic policy uncertainty (EPU) for New Zealand and examine the return and volatility spillovers from New Zealand (local) and US (foreign) EPU on aggregate (NZSE) and sectoral indices of New Zealand stock market. The multivariate VAR (1)-BEKK-GARCH model is employed for this purpose. Overall, our findings suggest that NZ equity sectors and NZSE receive much stronger and more pronounced spillover effects from US EPU compared to the local counterpart (NZ EPU). While the return spillovers from both EPUs are somewhat similar yet limited to just a few sectors, the effect of US EPU on NZ sectors’ volatility outstrips that of the NZ EPU. Furthermore, while the domestically oriented sectors are relatively more vulnerable to NZ EPU, those having export/import concentration with the US are mainly susceptible to US EPU. These findings may be useful to investors seeking sectoral diversification opportunities across New Zealand and the US.
Footnotes
1
See, for instance, World Economic Outlook (2011) and Foreign Financial Stability Report (2012) published by the IMF.
 
2
Other economic indicators that also fell to US uncertainty include output, consumption, exchange rate, commodity prices, and investment.
 
3
However, the study found no significant effects of US policy uncertainty shocks on Anglo-Saxon countries and New Zealand.
 
4
A notable exception is Kamber et al. (2016) that constructs and displays various uncertainty indices for New Zealand. However, this study did not create the news-based uncertainty index for New Zealand.
 
5
To capture NZ EPU and US EPU spillover effects on the overall stock market, we add the NZ aggregate stock market index (NZSE) to the list of sectors.
 
6
Note that the weekly index of NZ EPU reflects uncertainty for the whole week, whereas the US EPU is available at daily frequency and therefore represents uncertainty for a single day. Picking the value of US EPU on a particular week day to represent weekly US EPU would be misleading. To ensure consistency for both EPUs, we, therefore, take weekly average for the daily US EPU index and use this weekly series in our analysis.
 
7
Factiva database is owned by the Dow Jones & Company.
 
8
Note that, throughout the text, the term ‘group’ refers to all the sectors included in that group.
 
9
Among other popular uncertainty measures are Alexopoulos and Cohen (2015) and Jurado et al. (2015).
 
10
Our methodological approach is closely associated with Mateev (2019), which models the transmission of volatility across default swap and stock markets. We thank the anonymous referee for bringing this approach to our attention.
 
11
Appropriate lag length was chosen via Schwartz Information Criteria.
 
12
TMT is the abbreviation for the Technology, Media, and Telecom group.
 
Literature
go back to reference Alexopoulos M, Cohen J (2015) The power of print: uncertainty shocks, markets, and the economy. Int Rev Econ Financ 40:8–28 Alexopoulos M, Cohen J (2015) The power of print: uncertainty shocks, markets, and the economy. Int Rev Econ Financ 40:8–28
go back to reference Antonakakis N, Chatziantoniou I, Filis G (2013) Dynamic co-movements of stock market returns, implied volatility and policy uncertainty. Econ Lett 120(1):87–92 Antonakakis N, Chatziantoniou I, Filis G (2013) Dynamic co-movements of stock market returns, implied volatility and policy uncertainty. Econ Lett 120(1):87–92
go back to reference Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. Q J Econ 131(4):1593–1636 Baker SR, Bloom N, Davis SJ (2016) Measuring economic policy uncertainty. Q J Econ 131(4):1593–1636
go back to reference Balli F, Basher SA, Louis RJ (2013a) Sectoral equity returns and portfolio diversification opportunities across the GCC region. J Int Financ Mark Inst Money 25:33–48 Balli F, Basher SA, Louis RJ (2013a) Sectoral equity returns and portfolio diversification opportunities across the GCC region. J Int Financ Mark Inst Money 25:33–48
go back to reference Balli HO, Balli F, Louis RJ (2013b) Time-varying spillover effects on sectoral equity returns. Int Rev Financ 13(1):67–91 Balli HO, Balli F, Louis RJ (2013b) Time-varying spillover effects on sectoral equity returns. Int Rev Financ 13(1):67–91
go back to reference Balli F, Balli HO, Luu MN (2014) Diversification across ASEAN-wide sectoral and national equity returns. Econ Model 41:398–407 Balli F, Balli HO, Luu MN (2014) Diversification across ASEAN-wide sectoral and national equity returns. Econ Model 41:398–407
go back to reference Balli F, Uddin GS, Mudassar H, Yoon SM (2017) Cross-country determinants of economic policy uncertainty spillovers. Econ Lett 156:179–183 Balli F, Uddin GS, Mudassar H, Yoon SM (2017) Cross-country determinants of economic policy uncertainty spillovers. Econ Lett 156:179–183
go back to reference Bijsterbosch M, Guérin P (2013) Characterizing very high uncertainty episodes. Econ Lett 121(2):239–243 Bijsterbosch M, Guérin P (2013) Characterizing very high uncertainty episodes. Econ Lett 121(2):239–243
go back to reference Bloom N (2014) Fluctuations in uncertainty. J Econ Perspect 28(2):153–175 Bloom N (2014) Fluctuations in uncertainty. J Econ Perspect 28(2):153–175
go back to reference Colacito R, Engle RF, Ghysels E (2011) A component model for dynamic correlations. J Econ 164(1):45–59 Colacito R, Engle RF, Ghysels E (2011) A component model for dynamic correlations. J Econ 164(1):45–59
go back to reference Colombo V (2013) Economic policy uncertainty in the US: does it matter for the euro area? Econ Lett 121(1):39–42 Colombo V (2013) Economic policy uncertainty in the US: does it matter for the euro area? Econ Lett 121(1):39–42
go back to reference Dakhlaoui I, Aloui C (2016) The interactive relationship between the US economic policy uncertainty and BRIC stock markets. International Economics 146:141–157 Dakhlaoui I, Aloui C (2016) The interactive relationship between the US economic policy uncertainty and BRIC stock markets. International Economics 146:141–157
go back to reference Dickey DA, Fuller WA (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74(366a):427–431 Dickey DA, Fuller WA (1979) Distribution of the estimators for autoregressive time series with a unit root. J Am Stat Assoc 74(366a):427–431
go back to reference Engle RF, Kroner KF (1995) Multivariate simultaneous generalized ARCH. Econometric Theory 11(1):122–150 Engle RF, Kroner KF (1995) Multivariate simultaneous generalized ARCH. Econometric Theory 11(1):122–150
go back to reference Engle RF, Ghysels E, Sohn B (2013) Stock market volatility and macroeconomic fundamentals. Rev Econ Stat 95(3):776–797 Engle RF, Ghysels E, Sohn B (2013) Stock market volatility and macroeconomic fundamentals. Rev Econ Stat 95(3):776–797
go back to reference Gentzkow M, Shapiro JM (2010) What drives media slant? Evidence from US daily newspapers. Econometrica 78(1):35–71 Gentzkow M, Shapiro JM (2010) What drives media slant? Evidence from US daily newspapers. Econometrica 78(1):35–71
go back to reference Jurado K, Ludvigson SC, Ng S (2015) Measuring uncertainty. Am Econ Rev 105(3):1177–1216 Jurado K, Ludvigson SC, Ng S (2015) Measuring uncertainty. Am Econ Rev 105(3):1177–1216
go back to reference Kamber G, Karagedikli O, Ryan M, Vehbi T (2016) International spill-overs of uncertainty shocks: evidence from a FAVAR. Reserve Bank of New Zealand mimeo Kamber G, Karagedikli O, Ryan M, Vehbi T (2016) International spill-overs of uncertainty shocks: evidence from a FAVAR. Reserve Bank of New Zealand mimeo
go back to reference Klößner S, Sekkel R (2014) International spillovers of policy uncertainty. Econ Lett 124(3):508–512 Klößner S, Sekkel R (2014) International spillovers of policy uncertainty. Econ Lett 124(3):508–512
go back to reference Ko JH, Lee CM (2015) International economic policy uncertainty and stock prices: wavelet approach. Econ Lett 134:118–122 Ko JH, Lee CM (2015) International economic policy uncertainty and stock prices: wavelet approach. Econ Lett 134:118–122
go back to reference Liu L, Zhang T (2015) Economic policy uncertainty and stock market volatility. Financ Res Lett 15:99–105 Liu L, Zhang T (2015) Economic policy uncertainty and stock market volatility. Financ Res Lett 15:99–105
go back to reference Ljung GM, Box GE (1978) On a measure of lack of fit in time series models. Biometrika 65(2):297–303 Ljung GM, Box GE (1978) On a measure of lack of fit in time series models. Biometrika 65(2):297–303
go back to reference Mateev M (2019) Volatility relation between credit default swap and stock market: new empirical tests. J Econ Financ:1–32 Mateev M (2019) Volatility relation between credit default swap and stock market: new empirical tests. J Econ Financ:1–32
go back to reference Pastor L, Veronesi P (2012) Uncertainty about government policy and stock prices. J Financ 67(4):1219–1264 Pastor L, Veronesi P (2012) Uncertainty about government policy and stock prices. J Financ 67(4):1219–1264
go back to reference Pástor Ľ, Veronesi P (2013) Political uncertainty and risk premia. J Financ Econ 110(3):520–545 Pástor Ľ, Veronesi P (2013) Political uncertainty and risk premia. J Financ Econ 110(3):520–545
go back to reference Stockhammar P, Österholm P (2016) The impact of US uncertainty shocks on small open economies. Open Econ Rev:1–22 Stockhammar P, Österholm P (2016) The impact of US uncertainty shocks on small open economies. Open Econ Rev:1–22
go back to reference Su Z, Fang T, Yin L (2019) Understanding stock market volatility: what is the role of US uncertainty? N Am J Econ Financ 48:582–590 Su Z, Fang T, Yin L (2019) Understanding stock market volatility: what is the role of US uncertainty? N Am J Econ Financ 48:582–590
go back to reference Sum V (2013) The ASEAN stock market performance and economic policy uncertainty in the United States. Economic Papers: A journal of applied economics and policy 32(4):512–521 Sum V (2013) The ASEAN stock market performance and economic policy uncertainty in the United States. Economic Papers: A journal of applied economics and policy 32(4):512–521
go back to reference Tsui WHK, Balli F, Tan DTW, Lau O, Hasan M (2018) New Zealand business tourism: exploring the impact of economic policy uncertainties. Tour Econ 24(4):386–417 Tsui WHK, Balli F, Tan DTW, Lau O, Hasan M (2018) New Zealand business tourism: exploring the impact of economic policy uncertainties. Tour Econ 24(4):386–417
go back to reference Yu H, Fang L, Du D, Yan P (2017) How EPU drives long-term industry beta. Financ Res Lett 22:249–258 Yu H, Fang L, Du D, Yan P (2017) How EPU drives long-term industry beta. Financ Res Lett 22:249–258
go back to reference Yu H, Fang L, Zhang S, Du D (2018) The role of the political cycle in the relationship between economic policy uncertainty and the long-run volatility of industry-level stock returns in the United States. Appl Econ 50(26):2932–2937 Yu H, Fang L, Zhang S, Du D (2018) The role of the political cycle in the relationship between economic policy uncertainty and the long-run volatility of industry-level stock returns in the United States. Appl Econ 50(26):2932–2937
go back to reference International Monetary Fund, World Economic Outlook, September 2011 International Monetary Fund, World Economic Outlook, September 2011
go back to reference International Monetary Fund, Foreign Financial Stability Report, April 2012 International Monetary Fund, Foreign Financial Stability Report, April 2012
Metadata
Title
Economic policy uncertainty spillover effects on sectoral equity returns of New Zealand
Authors
Faruk Balli
Hatice O. Balli
Mudassar Hasan
Russell Gregory-Allen
Publication date
14-04-2020
Publisher
Springer US
Published in
Journal of Economics and Finance / Issue 4/2020
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI
https://doi.org/10.1007/s12197-020-09508-6

Other articles of this Issue 4/2020

Journal of Economics and Finance 4/2020 Go to the issue

Premium Partner