Foreign economic policy uncertainty and U.S. equity returns

Jahan-Parvar, Mohammad R.; Kitsul, Yuriy; Rahman, Jamil; Wilson, Beth Anne

doi:10.17016/IFDP.2024.1401

Working Paper

Foreign economic policy uncertainty and U.S. equity returns

Abstract: We document that foreign economic policy uncertainty (EPUF) has significant incremental predictive power for excess U.S. stock returns in the presence of domestic EPU, both in aggregate and for returns of portfolios constructed on firm characteristics, for 6 to 12-months-ahead horizons. We find that EPUF shocks primarily transmit to equity prices through cash flow news rather than the discount rate news channel. We examine whether responses of select macro-financial variables to an adverse EPUF shock are consistent with this transmission mechanism. Corporate investment outlays, payouts, and aggregate credit demand decline in response to such a shock.

Keywords: Economic policy uncertainty; Cash flows; Discount rates; ICAPM, Return predictability; Transmission channels;

JEL Classification: G11; G12; C13; E20; E30;

https://doi.org/10.17016/IFDP.2024.1401