Does US Economic Policy Uncertainty matter for European stock markets volatility?

In this study, we first investigate that whether the US EPU index can contain useful predictive information to help in forecasting European stock markets. Using the out-of-sample forecasts, we can obtain several noteworthy findings. First, the EPU index of European countries seems not to significantly increase the forecasts accuracy of these stock markets. Second, we determine that this model including the US EPU index can achieve better forecasting performance, strongly supports that it contains useful predictive information with respect to the European stock markets. Third, based on the US expansions and recessions, we find that the US EPU index can provide more useful forecasting information and can substantially increase the predictive ability for the European stock markets during the recessions than during the expansions. (C) 2018 Elsevier B.V. All rights reserved.