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Exploring the Relationship between Economic Policy Uncertainty and Financial Stress Indices of the US: Evidence from Fourier Series Approximation Procedures

Year 2021, Volume: 16 Issue: 61, 62 - 76, 31.01.2021
https://doi.org/10.19168/jyasar.835956

Abstract

We investigate the relationship between economic policy uncertainty (EPU) and St. Louis Fed’s financial stress (FS) indices for the US by using monthly data for the period 2013:1 – 2019:6 and employing linear (conventional) as well as nonlinear (exponential) unit root tests; nonlinear (exponential smooth transition autoregressive- ESTAR) cointegration test initially introduced by Kapetanios, Shin, and Snell (2006) (KSS) and residual-based Fourier cointegration test suggested by Yılancı (2019); conventional and Fourier Granger causality tests as well as asymmetric causality tests. Empirical findings from these procedures can be classified into three major categories: (i) The results from the KSS and residual-based Fourier cointegration analyses confirm each other that a long-run equilibrium exists between EPU and FS. (ii) Estimations from the Fourier Granger causality test that allows for structural breaks of unknown number and form unveiled that there is a one-way causality running from FS to EPU, a finding that contrasts with the one from the conventional procedure which shows a two-way causality. (iii) Finally, while the findings from the asymmetric causality testing procedure verified that a one-way causality exists running from the negative and positive components of FS to the negative and positive components of EPU, respectively; we found no evidence for such an asymmetric causality running from EPU to FS. These findings we believe shed a bright light on a major policy suggestion that the US policy makers should implement policies that stabilize the stress on the financial markets so as to leash the uncertainty associated with economic policies.

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References

  • Antonakakis, N., Chatziantoniou, I., & Filis, G. (2014). Dynamic spillovers of oil price shocks and economic policy uncertainty. Energy Economics, 44, 433-447.
  • Arouri, M., Estay, C., Rault, C., & Roubaud, D. (2016). Economic policy uncertainty and stock markets: Long-run evidence from the US. Finance Research Letters, 18, 136-141.
  • Asgharian, H., Christiansen, C., & Hou, A. J. (2019). Economic policy uncertainty and long-run stock market volatility and correlation. Available at SSRN 3146924.
  • Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The quarterly journal of economics, 131(4), 1593-1636.
  • Balcilar, M., Gupta, R., & Segnon, M. (2016a). The role of economic policy uncertainty in predicting US recessions: A mixed-frequency Markov-switching vector autoregressive approach. Economics: The Open-Access, Open-Assessment E-Journal, 10(2016-27), 1-20.
  • Balcilar, M., Gupta, R., Kyei, C., & Wohar, M. E. (2016b). Does economic policy uncertainty predict exchange rate returns and volatility? Evidence from a nonparametric causality-in-quantiles test. Open Economies Review, 27(2), 229-250.
  • Balcilar, M., Gupta, R., & Pierdzioch, C. (2016c). Does uncertainty move the gold price? New evidence from a nonparametric causality-in-quantiles test. Resources Policy, 49, 74-80.
  • Balcilar, M., Bekiros, S., & Gupta, R. (2017). The role of news-based uncertainty indices in predicting oil markets: a hybrid nonparametric quantile causality method. Empirical Economics, 53(3), 879-889.
  • Banerjee, P., Arčabić, V., & Lee, H. (2017). Fourier ADL cointegration test to approximate smooth breaks with new evidence from crude oil market. Economic Modelling, 67, 114-124.
  • Becker, R., Enders, W., & Lee, J. (2006). A stationarity test in the presence of an unknown number of smooth breaks. Journal of Time Series Analysis, 27(3), 381-409.
  • Bekiros, S., Gupta, R., & Majumdar, A. (2016). Incorporating economic policy uncertainty in US equity premium models: a nonlinear predictability analysis. Finance Research Letters, 18, 291-296
  • Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The quarterly journal of economics, 98(1), 85-106.
  • Bernanke, B. S., Lown, C. S., & Friedman, B. M. (1991). The credit crunch. Brookings papers on economic activity, 1991(2), 205-247.
  • Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. Handbook of macroeconomics, 1, 1341-1393.
  • Dakhlaoui, I., & Aloui, C. (2016). The interactive relationship between the US economic policy uncertainty and BRIC stock markets. International Economics, 146, 141-157.
  • Dickey, D. A. & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series With a Unit Root. Journal of the American Statistical Association, 74(366), 427-431.
  • Enders, W., & Lee, J. (2012). A unit root test using a Fourier series to approximate smooth breaks. Oxford bulletin of Economics and Statistics, 74(4), 574-599.
  • Enders, W., & Jones, P. (2016). Grain prices, oil prices, and multiple smooth breaks in a VAR. Studies in Nonlinear Dynamics & Econometrics, 20(4), 399-419.
  • Gallant, A. R. (1981). On the bias in flexible functional forms and an essentially unbiased form: the Fourier flexible form. Journal of Econometrics, 15(2), 211-245.
  • Granger, C. W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica: journal of the Econometric Society, 424-438.
  • Gregory, A. W., & Hansen, B. E. (1996). Residual-based tests for cointegration in models with regime shifts. Journal of econometrics, 70(1), 99-126.
  • Gulen, H., & Ion, M. (2016). Policy uncertainty and corporate investment. The Review of Financial Studies, 29(3), 523-564.
  • Gupta, R., Pierdzioch, C., & Risse, M. (2016). On international uncertainty links: BART-based empirical evidence for Canada. Economics Letters, 143, 24-27.
  • Hammoudeh, S., & McAleer, M. (2015). Advances in financial risk management and economic policy uncertainty: An overview. International Review of Economics & Finance, 40, 1-7.
  • Hatemi-j, A. (2008). Tests for cointegration with two unknown regime shifts with an application to financial market integration. Empirical Economics, 35(3), 497-505.
  • Hatemi-j, A. (2012). Asymmetric causality tests with an application. Empirical Economics, 43(1), 447-456.
  • IMF. (2006). Financial systems and economic cycles. World economic outlook.
  • Kapetanios, G., Shin, Y., & Snell, A. (2003). Testing for a unit root in the nonlinear STAR framework. Journal of econometrics, 112(2), 359-379.
  • Kapetanios, G., Shin, Y., & Snell, A. (2006). Testing for cointegration in nonlinear smooth transition error correction models. Econometric Theory, 279-303.
  • Karnizova, L., & Li, J. C. (2014). Economic policy uncertainty, financial markets and probability of US recessions. Economics Letters, 125(2), 261-265.
  • Kliesen, K., & Smith, D. C. (2010). Measuring financial market stress. economic synopses.
  • Kwiatkowski, D., Phillips, P. C., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of econometrics, 54(1-3), 159-178.
  • Liow, K. H., Liao, W. C., & Huang, Y. (2018). Dynamics of international spillovers and interaction: Evidence from financial market stress and economic policy uncertainty. Economic Modelling, 68, 96-116.
  • Liu, L., & Zhang, T. (2015). Economic policy uncertainty and stock market volatility. Finance Research Letters, 15, 99-105.
  • Lo Duca, M., & Peltonen, T. A. (2011). Macro-financial vulnerabilities and future financial stress-Assessing systemic risks and predicting systemic events. Working paper.
  • McCracken, M. (2018). What Are Indicators Saying about a Potential Recession?. On the economy blog. https://www.stlouisfed.org/on-the-economy/2018/february/indicators-saying-about-potential-recession
  • Nazlioglu, S., Soytas, U., & Gupta, R. (2015). Oil prices and financial stress: A volatility spillover analysis. Energy policy, 82, 278-288.
  • Owyang, M. & Shell, H. (2016). Is the Yield Curve Signaling a Recession?. On the economy blog. https://www.stlouisfed.org/on-the-economy/2016/march/is-yield-curve-signaling-recession
  • Pastor, L., & Veronesi, P. (2012). Uncertainty about government policy and stock prices. The journal of Finance, 67(4), 1219-1264.
  • Pastor, L., & Veronesi, P. (2013). Political uncertainty and risk premia. Journal of financial Economics, 110(3), 520-545.
  • Perron, P. (1989). The great crash, the oil price shock, and the unit root hypothesis. Econometrica: journal of the Econometric Society, 1361-1401.
  • Phillips, P. B. & Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika, 75(2), 335-346.
  • Reboredo, J. C., & Uddin, G. S. (2016). Do financial stress and policy uncertainty have an impact on the energy and metals markets? A quantile regression approach. International Review of Economics & Finance, 43, 284-298.
  • Sun, X., Yao, X., & Wang, J. (2017). Dynamic interaction between economic policy uncertainty and financial stress: A multi-scale correlation framework. Finance Research Letters, 21, 214-221.
  • Tiwari, A. K., Nasir, M. A., & Shahbaz, M. (2020). Synchronisation of policy related uncertainty, financial stress and economic activity in the United States. International Journal of Finance & Economics.
  • Tsong, C. C., Lee, C. F., Tsai, L. J., & Hu, T. C. (2016). The Fourier approximation and testing for the null of cointegration. Empirical Economics, 51(3), 1085-1113.
  • Yilanci, V. (2019). A Residual-Based Cointegration test with a Fourier Approximation. MPRA papers. https://mpra.ub.uni-muenchen.de/95395/1/MPRA_paper_95395.pdf

ABD’nin Ekonomi Politikası Belirsizliği ve Finansal Baskı Endeksleri Arasındaki İlişkinin Araştırılması: Fourier Serisi Yaklaşımı Yöntemlerinden Kanıtlar

Year 2021, Volume: 16 Issue: 61, 62 - 76, 31.01.2021
https://doi.org/10.19168/jyasar.835956

Abstract

Bu çalışmada, ABD’nin ekonomi politikası belirsizliği (EPU) ve St. Louis Fed’in finansal baskı (FS) endeksleri arasındaki ilişkiler, 2013:1-2019:6 dönemini kapsayan aylık veriler kullanılarak yürütülen doğrusal (geleneksel) ve doğrusal olmayan (üstel) birim kök testleri; Kapetanios, Shin ve Snell (2006) (KSS) tarafından literatüre kazandırılan doğrusal olmayan (üstel yumuşak geçişli otoregresif- ESTAR) eşbütünleşme testi ve Yılancı (2019) tarafından geliştirilen kalıntı temelli Fourier eşbütünleşme testi; geleneksel Granger nedensellik, Fourier Granger nedensellik ve asimetrik nedensellik testleri aracılığıyla keşfedilmeye çalışılmaktadır. Ampirik analizlerden edinilen bulgular üç ayrı kümede özetlenebilir: (i) KSS ve kalıntı temelli Fourier eşbütünleşme testlerinden sağlanan bulgular birbirini destekler niteliktedir; yani, bu bulgular EPU ile FS arasında uzun dönemli bir denge ilişkisinin varlığını ortaya koymaktadır. (ii) EPU ile FS arasında iki yönlü nedensellik ilişkisinin varlığını gösteren geleneksel Granger nedensellik testinden farklı olarak, bilinmeyen formda ve sayıda yapısal kırılmaları dikkate alan Fourier Granger nedensellik testi, yalnızca FS’den EPU’ya doğru tek yönlü nedensellik ilişkisi olduğuna işaret etmektedir. (iii) Son olarak, asimetrik nedensellik testinden elde edilen sonuçlar, FS’nin negatif ve pozitif bileşeninden EPU’nun sırasıyla negatif ve pozitif bileşenine doğru tek yönlü nedensellik ilişkisinin varlığını kanıtlarken; EPU’dan FS’ye doğru benzer bir asimetrik nedensellik ilişkisinin varlığını desteklememektedir. Bu sonuçların ışığında, ABD’nin ekonomi politikalarının içerdiği belirsizliği dizginlemek amacıyla politika yapıcıların, finansal piyasalardaki baskıyı stabilize edecek politika tedbirlerini uygulamaya koyabilecekleri söylenebilir.

Project Number

-

References

  • Antonakakis, N., Chatziantoniou, I., & Filis, G. (2014). Dynamic spillovers of oil price shocks and economic policy uncertainty. Energy Economics, 44, 433-447.
  • Arouri, M., Estay, C., Rault, C., & Roubaud, D. (2016). Economic policy uncertainty and stock markets: Long-run evidence from the US. Finance Research Letters, 18, 136-141.
  • Asgharian, H., Christiansen, C., & Hou, A. J. (2019). Economic policy uncertainty and long-run stock market volatility and correlation. Available at SSRN 3146924.
  • Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The quarterly journal of economics, 131(4), 1593-1636.
  • Balcilar, M., Gupta, R., & Segnon, M. (2016a). The role of economic policy uncertainty in predicting US recessions: A mixed-frequency Markov-switching vector autoregressive approach. Economics: The Open-Access, Open-Assessment E-Journal, 10(2016-27), 1-20.
  • Balcilar, M., Gupta, R., Kyei, C., & Wohar, M. E. (2016b). Does economic policy uncertainty predict exchange rate returns and volatility? Evidence from a nonparametric causality-in-quantiles test. Open Economies Review, 27(2), 229-250.
  • Balcilar, M., Gupta, R., & Pierdzioch, C. (2016c). Does uncertainty move the gold price? New evidence from a nonparametric causality-in-quantiles test. Resources Policy, 49, 74-80.
  • Balcilar, M., Bekiros, S., & Gupta, R. (2017). The role of news-based uncertainty indices in predicting oil markets: a hybrid nonparametric quantile causality method. Empirical Economics, 53(3), 879-889.
  • Banerjee, P., Arčabić, V., & Lee, H. (2017). Fourier ADL cointegration test to approximate smooth breaks with new evidence from crude oil market. Economic Modelling, 67, 114-124.
  • Becker, R., Enders, W., & Lee, J. (2006). A stationarity test in the presence of an unknown number of smooth breaks. Journal of Time Series Analysis, 27(3), 381-409.
  • Bekiros, S., Gupta, R., & Majumdar, A. (2016). Incorporating economic policy uncertainty in US equity premium models: a nonlinear predictability analysis. Finance Research Letters, 18, 291-296
  • Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The quarterly journal of economics, 98(1), 85-106.
  • Bernanke, B. S., Lown, C. S., & Friedman, B. M. (1991). The credit crunch. Brookings papers on economic activity, 1991(2), 205-247.
  • Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. Handbook of macroeconomics, 1, 1341-1393.
  • Dakhlaoui, I., & Aloui, C. (2016). The interactive relationship between the US economic policy uncertainty and BRIC stock markets. International Economics, 146, 141-157.
  • Dickey, D. A. & Fuller, W. A. (1979). Distribution of the Estimators for Autoregressive Time Series With a Unit Root. Journal of the American Statistical Association, 74(366), 427-431.
  • Enders, W., & Lee, J. (2012). A unit root test using a Fourier series to approximate smooth breaks. Oxford bulletin of Economics and Statistics, 74(4), 574-599.
  • Enders, W., & Jones, P. (2016). Grain prices, oil prices, and multiple smooth breaks in a VAR. Studies in Nonlinear Dynamics & Econometrics, 20(4), 399-419.
  • Gallant, A. R. (1981). On the bias in flexible functional forms and an essentially unbiased form: the Fourier flexible form. Journal of Econometrics, 15(2), 211-245.
  • Granger, C. W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica: journal of the Econometric Society, 424-438.
  • Gregory, A. W., & Hansen, B. E. (1996). Residual-based tests for cointegration in models with regime shifts. Journal of econometrics, 70(1), 99-126.
  • Gulen, H., & Ion, M. (2016). Policy uncertainty and corporate investment. The Review of Financial Studies, 29(3), 523-564.
  • Gupta, R., Pierdzioch, C., & Risse, M. (2016). On international uncertainty links: BART-based empirical evidence for Canada. Economics Letters, 143, 24-27.
  • Hammoudeh, S., & McAleer, M. (2015). Advances in financial risk management and economic policy uncertainty: An overview. International Review of Economics & Finance, 40, 1-7.
  • Hatemi-j, A. (2008). Tests for cointegration with two unknown regime shifts with an application to financial market integration. Empirical Economics, 35(3), 497-505.
  • Hatemi-j, A. (2012). Asymmetric causality tests with an application. Empirical Economics, 43(1), 447-456.
  • IMF. (2006). Financial systems and economic cycles. World economic outlook.
  • Kapetanios, G., Shin, Y., & Snell, A. (2003). Testing for a unit root in the nonlinear STAR framework. Journal of econometrics, 112(2), 359-379.
  • Kapetanios, G., Shin, Y., & Snell, A. (2006). Testing for cointegration in nonlinear smooth transition error correction models. Econometric Theory, 279-303.
  • Karnizova, L., & Li, J. C. (2014). Economic policy uncertainty, financial markets and probability of US recessions. Economics Letters, 125(2), 261-265.
  • Kliesen, K., & Smith, D. C. (2010). Measuring financial market stress. economic synopses.
  • Kwiatkowski, D., Phillips, P. C., Schmidt, P., & Shin, Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root. Journal of econometrics, 54(1-3), 159-178.
  • Liow, K. H., Liao, W. C., & Huang, Y. (2018). Dynamics of international spillovers and interaction: Evidence from financial market stress and economic policy uncertainty. Economic Modelling, 68, 96-116.
  • Liu, L., & Zhang, T. (2015). Economic policy uncertainty and stock market volatility. Finance Research Letters, 15, 99-105.
  • Lo Duca, M., & Peltonen, T. A. (2011). Macro-financial vulnerabilities and future financial stress-Assessing systemic risks and predicting systemic events. Working paper.
  • McCracken, M. (2018). What Are Indicators Saying about a Potential Recession?. On the economy blog. https://www.stlouisfed.org/on-the-economy/2018/february/indicators-saying-about-potential-recession
  • Nazlioglu, S., Soytas, U., & Gupta, R. (2015). Oil prices and financial stress: A volatility spillover analysis. Energy policy, 82, 278-288.
  • Owyang, M. & Shell, H. (2016). Is the Yield Curve Signaling a Recession?. On the economy blog. https://www.stlouisfed.org/on-the-economy/2016/march/is-yield-curve-signaling-recession
  • Pastor, L., & Veronesi, P. (2012). Uncertainty about government policy and stock prices. The journal of Finance, 67(4), 1219-1264.
  • Pastor, L., & Veronesi, P. (2013). Political uncertainty and risk premia. Journal of financial Economics, 110(3), 520-545.
  • Perron, P. (1989). The great crash, the oil price shock, and the unit root hypothesis. Econometrica: journal of the Econometric Society, 1361-1401.
  • Phillips, P. B. & Perron, P. (1988). Testing for a Unit Root in Time Series Regression. Biometrika, 75(2), 335-346.
  • Reboredo, J. C., & Uddin, G. S. (2016). Do financial stress and policy uncertainty have an impact on the energy and metals markets? A quantile regression approach. International Review of Economics & Finance, 43, 284-298.
  • Sun, X., Yao, X., & Wang, J. (2017). Dynamic interaction between economic policy uncertainty and financial stress: A multi-scale correlation framework. Finance Research Letters, 21, 214-221.
  • Tiwari, A. K., Nasir, M. A., & Shahbaz, M. (2020). Synchronisation of policy related uncertainty, financial stress and economic activity in the United States. International Journal of Finance & Economics.
  • Tsong, C. C., Lee, C. F., Tsai, L. J., & Hu, T. C. (2016). The Fourier approximation and testing for the null of cointegration. Empirical Economics, 51(3), 1085-1113.
  • Yilanci, V. (2019). A Residual-Based Cointegration test with a Fourier Approximation. MPRA papers. https://mpra.ub.uni-muenchen.de/95395/1/MPRA_paper_95395.pdf
There are 47 citations in total.

Details

Primary Language English
Journal Section Articles
Authors

Mustafa Erhan Bilman 0000-0003-4058-8681

Sadik Karaoğlan 0000-0001-8343-1487

Project Number -
Publication Date January 31, 2021
Published in Issue Year 2021 Volume: 16 Issue: 61

Cite

APA Bilman, M. E., & Karaoğlan, S. (2021). Exploring the Relationship between Economic Policy Uncertainty and Financial Stress Indices of the US: Evidence from Fourier Series Approximation Procedures. Yaşar Üniversitesi E-Dergisi, 16(61), 62-76. https://doi.org/10.19168/jyasar.835956
AMA Bilman ME, Karaoğlan S. Exploring the Relationship between Economic Policy Uncertainty and Financial Stress Indices of the US: Evidence from Fourier Series Approximation Procedures. Yaşar Üniversitesi E-Dergisi. January 2021;16(61):62-76. doi:10.19168/jyasar.835956
Chicago Bilman, Mustafa Erhan, and Sadik Karaoğlan. “Exploring the Relationship Between Economic Policy Uncertainty and Financial Stress Indices of the US: Evidence from Fourier Series Approximation Procedures”. Yaşar Üniversitesi E-Dergisi 16, no. 61 (January 2021): 62-76. https://doi.org/10.19168/jyasar.835956.
EndNote Bilman ME, Karaoğlan S (January 1, 2021) Exploring the Relationship between Economic Policy Uncertainty and Financial Stress Indices of the US: Evidence from Fourier Series Approximation Procedures. Yaşar Üniversitesi E-Dergisi 16 61 62–76.
IEEE M. E. Bilman and S. Karaoğlan, “Exploring the Relationship between Economic Policy Uncertainty and Financial Stress Indices of the US: Evidence from Fourier Series Approximation Procedures”, Yaşar Üniversitesi E-Dergisi, vol. 16, no. 61, pp. 62–76, 2021, doi: 10.19168/jyasar.835956.
ISNAD Bilman, Mustafa Erhan - Karaoğlan, Sadik. “Exploring the Relationship Between Economic Policy Uncertainty and Financial Stress Indices of the US: Evidence from Fourier Series Approximation Procedures”. Yaşar Üniversitesi E-Dergisi 16/61 (January 2021), 62-76. https://doi.org/10.19168/jyasar.835956.
JAMA Bilman ME, Karaoğlan S. Exploring the Relationship between Economic Policy Uncertainty and Financial Stress Indices of the US: Evidence from Fourier Series Approximation Procedures. Yaşar Üniversitesi E-Dergisi. 2021;16:62–76.
MLA Bilman, Mustafa Erhan and Sadik Karaoğlan. “Exploring the Relationship Between Economic Policy Uncertainty and Financial Stress Indices of the US: Evidence from Fourier Series Approximation Procedures”. Yaşar Üniversitesi E-Dergisi, vol. 16, no. 61, 2021, pp. 62-76, doi:10.19168/jyasar.835956.
Vancouver Bilman ME, Karaoğlan S. Exploring the Relationship between Economic Policy Uncertainty and Financial Stress Indices of the US: Evidence from Fourier Series Approximation Procedures. Yaşar Üniversitesi E-Dergisi. 2021;16(61):62-76.