On economic uncertainty, stock market predictability and nonlinear spillover effects
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Date
Authors
Bekiros, Stelios
Gupta, Rangan
Kyei, Clement Kweku
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Abstract
This paper uses a k-th order nonparametric Granger causality test to analyze whether firmlevel,
economic policy and macroeconomic uncertainty indicators predict movements in real stock
returns and their volatility. Linear Granger causality tests show that whilst economic policy and
macroeconomic uncertainty indices can predict stock returns, firm-level uncertainty measures
possess no predictability. However, given the existence of structural breaks and inherent
nonlinearities in the series, we employ a nonparametric causality methodology, since the linear
model is misspecified and the results emanating from it cannot be considered reliable. The
nonparametric test reveals that, in fact, there is in general no predictability from the various
measures of uncertainties, i.e., firm-level, macroeconomic, and economic policy uncertainty, for
real stock returns. In turn, the predictability is concentrated in the volatility of real stock returns,
except under the case of firm-level uncertainty. Thus, our results not only emphasize the role of
economic and firm-level uncertainty measures in predicting volatility of stock returns, but also
presage against using linear models which are likely to suffer from misspecification in the presence
of parameter instability and nonlinear spillover effects.
Description
Keywords
Economic policy, Stock markets, Nonlinear causality
Sustainable Development Goals
Citation
Bekiros, S, Gupta, R & Kyei, C 2016, 'On economic uncertainty, stock market predictability and nonlinear spillover effects', North American Journal of Economics and Finance, vol. 36, pp. 184-191.