Economic Policy Uncertainty and Investor Sentiment: linear and nonlinear causality analysis

ABSTRACT

In this paper, we study the relationship between economic policy uncertainty and investor sentiment. US data were analysed based on linear and non-linear Granger causality analysis. We reveal the obvious impact that economic policy uncertainty has on the investor sentiment, which can be explained by the real option and financial constraint theory.

KEYWORDS:

• Economic policy uncertainty index
• investor sentiment
• Granger test
• linear

JEL CLASSIFICATION:

• G10
• G00

Highlight

• This is the first paper to reveal the relationship between EPU and investor sentiment.

• Linear and non-linear Granger causality tests are used to detect the relationship.

• Results show that Granger relationship runs from EPU to ICS.

Disclosure statement

No potential conflict of interest was reported by the author.