Impacts of economic policy uncertainty on the time-varying risk–return relationship: evidence from G7 countries

ABSTRACT

This paper examines the impact of country-specific and global economic policy uncertainty (EPU) on the time-varying risk – return relationship in G7 stock markets and explores whether this impact is significantly different during the 2008 Global Financial Crisis (GFC). Empirical results suggest that the risk – return trade-off varies with many factors. More importantly, we find that both the national and global EPU shocks have significant and negative impacts on the time-varying risk – return relationship in all G7 countries, and these negative impacts increase and intensify during the GFC.

KEYWORDS:

• Economic policy uncertainty
• risk–return relationship
• GARCH-M model
• G7 countries

JEL CLASSIFICATION:

• G12
• G15
• C13
• E44
• E32

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work is supported by the National Science Foundation of China (71701081), and the National Social Science Foundation of China (21FJYB003)