Abstract:
This study examines the effect of economic policy uncertainty on stock market return and
risk for the group of seven countries. We contribute to the existing literature by incorporating country specific and market condition specific characteristics while examining the relationship. Country specific effect is controlled by a PVAR model with country fixed effect, while a MSVAR model is used to study the relationship under differential market conditions, viz., bull and bear. Both models suggest that a rise in EPU increases volatility at the same time period and that leads to a decrease in return. Thereafter, return increases and volatility falls as a result of a positive uncertainty shock. MSVAR model suggests that the response of risk and return to a shock in EPU is highly asymmetric and it is much higher in bear market than the bull market
