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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

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.

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See, for instance, World Economic Outlook (2011) and Foreign Financial Stability Report (2012) published by the IMF.

Other economic indicators that also fell to US uncertainty include output, consumption, exchange rate, commodity prices, and investment.

However, the study found no significant effects of US policy uncertainty shocks on Anglo-Saxon countries and New Zealand.

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.

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.

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.

Factiva database is owned by the Dow Jones & Company.

Note that, throughout the text, the term ‘group’ refers to all the sectors included in that group.

Among other popular uncertainty measures are Alexopoulos and Cohen (2015) and Jurado et al. (2015).

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.

Appropriate lag length was chosen via Schwartz Information Criteria.

TMT is the abbreviation for the Technology, Media, and Telecom group.

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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

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