Economic policy uncertainty and stock markets' co-movements

Here, we investigate the direction of the relationship between economic policy uncertainty (EPU) and stock markets. We focus on time-variant co-movements between the EPU index and selected stock market indices (S&P500, UK100, Nikkei225 and DAX30) at different investment horizons. We show that the EPU index lags stock markets at longer investment horizons during global financial turmoil, especially in the United States, Japan and Germany. The identified lag between the changes of the EPU index and selected stock market indices ranges between 2 and 6 months at investment horizons exceeding 32 months. In addition, we confirm the existence of the short-term effects of EPU on stock markets.