Frequency-domain approach to the causal nexus between domestic and international economic policy uncertainties and equity returns of G20 countries

Figures & data

Table 1. Descriptive statistics.

Country	Mean	Max	Min	Std	Skew	Kurt	JB	CV
Panel A: Economic policy uncertainty series
Argentina	0.07	294.28	−227.70	87.53	0.26	3.51	6.38**	1250.43
Australia	0.11	125.20	−166.78	38.60	−0.05	3.87	9.46**	350.91
Brazil	0.51	142.42	−133.04	48.16	0.01	3.05	0.03	94.43
Canada	0.18	96.73	−80.87	28.59	0.17	3.30	2.50	158.83
China	0.49	194.66	−179.01	43.35	−0.09	6.37	139.21***	88.47
EU	0.18	87.26	−73.16	23.27	0.44	4.03	22.27***	129.28
France	0.31	6.35	2.42	0.74	−0.56	2.76	14.74***	2.39
Germany	0.27	123.94	−98.79	39.00	0.26	3.07	3.28	144.44
India	−0.19	113.31	−155.65	36.44	−0.17	4.31	22.44***	−191.79
Indonesia	−0.02	106.91	−75.00	26.46	0.22	4.19	19.83***	−1323.0
Italy	−0.12	107.50	−89.63	33.37	0.01	3.66	5.27*	−278.08
Japan	−0.08	58.11	−62.26	19.09	−0.08	3.89	10.01**	−238.63
South Africa	0.21	204.22	−257.86	47.49	−0.22	9.40	502.85***	226.14
South Korea	0.14	125.97	−83.64	35.48	0.34	3.63	10.32**	253.43
Turkey	0.004	4.63	−4.64	0.91	0.19	11.42	866.22***	227.50
Mexico	−0.20	230.41	−135.29	44.72	0.42	4.96	55.38***	−223.60
Russia	0.26	175.26	−208.56	65.17	−0.23	3.39	4.31	250.65
UK	0.25	84.01	−91.20	30.09	−0.01	3.13	0.21	120.36
United States	0.23	107.65	−91.89	27.26	0.50	4.67	46.37***	118.52
Panel B: Equity market returns series
Argentina	2.69	27.69	−52.74	11.06	−0.75	3.54	181.04***	4.11
Australia	0.39	10.78	−28.53	4.31	−1.73	11.49	1025.13***	11.05
Brazil	0.79	20.15	−53.37	7.84	−2.17	14.78	2763.07***	9.92
Canada	0.41	18.25	−24.83	4.71	−1.20	8.09	386.77***	11.49
China	0.45	30.61	−28.75	7.52	−0.10	4.97	48.04***	16.71
EU	0.39	16.29	−45.43	6.39	−2.82	18.65	4653.24***	16.39
France	0.29	16.60	−24.75	6.09	−0.89	5.53	112.24***	21.00
Germany	0.45	19.37	−29.33	6.21	−0.86	5.72	121.35***	13.80
India	0.99	27.23	−35.15	7.37	−0.75	5.68	115.42***	7.44
Indonesia	1.03	19.77	−36.75	5.42	−2.00	15.34	3079.21***	5.26
Italy	0.17	32.16	−39.12	8.10	−0.80	8.17	181.83***	47.65
Japan	0.15	15.82	−35.77	6.13	−0.80	6.28	162.27***	40.87
South Africa	0.80	16.91	−17.26	4.47	−0.15	2.08	53.99***	5.59
South Korea	0.55	32.08	−40.75	8.08	−0.40	6.11	126.19***	14.69
Turkey	2.04	34.14	−52.74	7.96	−1.70	15.51	3088.48***	3.90
Mexico	0.90	17.66	−31.92	6.06	−0.93	6.65	205.01***	6.73
Russia	0.53	51.94	−76.81	12.63	−1.05	9.99	623.66***	23.83
UK	0.11	12.91	−22.75	4.59	−1.17	7.86	340.67***	41.73
United States	0.54	23.59	−29.69	5.09	−1.22	10.96	810.30***	9.43

Notes: ***, ** and * represent a rejection of the null hypotheses of normality at 1%, 5%, and 10% significance levels, respectively. Min, Max, Std, skew, Kurt, JB and CV denote minimum, maximum, standard deviation, skewness, kurtosis, Jarge-Bera statistic, and Coefficient of variation, respectively. Panel A represents the summary statistics for the EPU index series, and Panel B represents the summary statistics for the EMR series. The UK denotes the United Kingdom.

Figure 1. Causal nexus between DEPU & EMR.

Figure 2. Causal nexus between US EPU and EMR.

Table 2. Causal nexus between domestic economic policy uncertainty and equity market returns.

	Time			$H_0:\mathit{\text{DEPU}}\Rightarrow \mathit{\text{EMR}}$			$H_0:\mathit{\text{EMR}}\Rightarrow \mathit{\text{DEPU}}$			Causality outcome
				LR	IP	SR	LR	IP	SR	LR	IP	SR
Country	period	K + dmax	Lag	$\omega$ =0.5	$\omega$ =1.5	$\omega$ =2.5	$\omega$ =0.5	$\omega$ =1.5	$\omega$ =2.5	$\omega$ =0.5	$\omega$ =1.5	$\omega$ =2.5
Australia	1997–2021	4	3	0.3196	1.7484	2.2097	15.9005	9.2022	8.6927	ELH	ELH	ELH
				[0.8523]	[0.4172]	[0.3313]	[0.0004]	[0.0100]	[0.0130]
Canada	1997–2021	4	3	1.1485	3.8551	3.6868	24.2110	19.3402	13.5175	ELH	ELH	ELH
				[0.5631]	[0.1455]	[0.1583]	[0.0000]	[0.0001]	[0.0012]
China	1997–2021	4	4	1.6483	1.7726	0.0351	6.3930	7.7178	2.6126	ELH	ELH	NTH
				[0.4386]	[0.4122]	[0.9826]	[0.0409]	[0.0211]	[0.2708]
France	1997–2021	4	3	2.0335	6.1451	6.5957	4.0404	3.2722	5.0387	NTH	ULH	FBH
				[0.3618]	[0.0463]	[0.0370]	[0.1326]	[0.1947]	[0.0805]
Germany	1997–2021	4	3	2.7917	2.0692	1.8264	14.1081	12.1079	8.0981	ELH	ELH	ELH
				[0.2476]	[0.3554]	[0.4012]	[0.0009]	[0.0023]	[0.0174]
India	1997–2021	4	3	2.8409	4.1978	5.3012	10.6941	7.6834	4.7834	ELH	ULH	FBH
				[0.2416]	[0.1226]	[0.0706]	[0.0048]	[0.0215]	[0.0915]
Italy	1997–2021	5	4	15.8343	14.1328	4.7766	5.2840	0.3204	3.1009	FBH	ULH	ULH
				[0.0004]	[0.0009]	[0.0918]	[0.0712]	[0.8520]	[0.2122]
Japan	1997–2021	4	3	1.0884	4.6629	4.3880	9.7008	8.3171	8.6352	ELH	FBH	ELH
				[0.5803]	[0.0972]	[0.1115]	[0.0078]	[0.0156]	[0.0133]
Korea	1997–2021	4	3	7.8401	7.6471	4.5284	20.6001	12.5893	12.1294	FBH	FBH	ELH
				[0.0198]	[0.0219]	[0.1039]	[0.0000]	[0.0018]	[0.0023]
Mexico	1997–2021	4	3	4.2087	2.9354	1.4125	16.1118	8.6814	8.7951	ELH	ELH	ELH
				[0.1219]	[0.2305]	[0.4935]	[0.0003]	[0.0130]	[0.0123]
Russia	1997–2021	4	3	2.2938	2.0618	2.0662	1.6454	1.0610	0.0941	NTH	NTH	NTH
				[0.3176]	[0.3567]	[0.3559]	[0.4393]	[0.5883]	[0.9540]
UK	1997–2021	5	4	3.2492	4.0678	3.5694	8.2782	1.8056	3.5614	ELH	NTH	NTH
				[0.1970]	[0.1308]	[0.1678]	[0.0159]	[0.4054]	[0.1685]
US	1997–2021	5	4	14.0697	10.7022	11.9948	4.3696	5.6028	0.6719	ULH	FBH	ELH
				[0.0009]	[0.0047]	[0.0025]	[0.1125]	[0.0607]	[0.7146]
Brazil	1998–2021	4	3	0.1316	0.2087	0.0488	14.9138	13.3869	10.6882	ELH	ELH	ELH
				[0.9363]	[0.9009]	[0.9759]	[0.0006]	[0.0012]	[0.0048]
Argentina	1998–2021	5	4	0.1407	0.1933	0.1947	0.9881	0.4007	1.9445	NTH	NTH	NTH
				[0.9321]	[0.9079]	[0.3782]	[0.6101]	[0.8184]	[0.3782]
EU	1998–2021	5	4	1.9383	1.2038	1.3994	12.5820	9.2688	0.4577	ELH	ELH	NTH
				[0.3794]	[0.5478]	[0.4967]	[0.0019]	[0.0097]	[0.7955]
SA	1997–2021	4	3	1.1936	0.3934	0.9297	0.3296	0.2314	0.5526	NTH	NTH	NTH
				[0.5506]	[0.8214]	[0.6282]	[0.8481]	[0.8907]	[0.7586]
Turkey	1997–2021	4	3	1.1177	1.5933	0.2891	1.0789	1.1264	1.0548	NTH	NTH	NTH
				[0.5719]	[0.4508]	[0.8654]	[0.5831]	[0.5694]	[0.5901]
Indonesia	2001–2021	5	4	0.6189	3.9296	4.5301	2.1086	4.2762	7.0941	NTH	NTH	ELH
				[0.7338]	[0.1402]	[0.1038]	[0.3484]	[0.1179]	[0.0288]

Notes: We present the BC frequency-domain causality test using the Wald test. P-values are reported in []. $H_0:\mathit{\text{DEPU}}\Rightarrow \mathit{\text{EMR}}$ represents the null hypothesis of no Granger causality from domestic economic policy uncertainty to equity market returns. $H_0:\mathit{\text{EMR}}\Rightarrow \mathit{\text{DEPU}}$ denotes the null hypothesis of no Granger causality from equity market returns to domestic economic policy uncertainty. Abbreviations: ULH, uncertainty-leads hypothesis; ELH, equity-leads hypothesis; FBH, feedback hypothesis; NTH, neutrality hypothesis; SR, short-run; IP, intermediate period; LR, long run. K + dmax represents the sum of the optimal lag length and the maximum order of integration. To make a valid model, $k\ge \mathit{\text{dmax}}.$

Table 3. Causal nexus between international (US) economic policy uncertainty and equity market returns.

				$H_0:\mathit{\text{USEPU}}\Rightarrow \mathit{\text{EMR}}$			$H_0:\mathit{\text{EMR}}\Rightarrow \mathit{\text{USEPU}}$			Causality outcome
	Time			LR	IP	SR	LR	IP	SR	LR	IP	SR
Country	period	K + dmax	Lag	$\omega$ =0.5	$\omega$ =1.5	$\omega$ =2.5	$\omega$ =0.5	$\omega$ =1.5	$\omega$ =2.5	$\omega$ =0.5	$\omega$ =1.5	$\omega$ =2.5
Australia	1997–2021	5	4	1.2599	1.7779	0.5504	16.0463	2.1692	1.9011	ELH	NTH	NTH
				[0.5326]	[0.4111]	[0.7594]	[0.0003]	[0.3380]	[0.3865]
Canada	1997–2021	5	4	2.2578	2.9647	0.8521	23.3936	9.8651	1.9729	ELH	ELH	NTH
				[0.3234]	[0.2271]	[0.6531]	[0.0000]	[0.0072]	[1.9729]
China	1997–2021	5	4	1.2287	0.4181	5.4452	2.3188	1.3242	0.4784	NTH	NTH	ULH
				[0.5410]	[0.8114]	[0.0657]	[0.3137]	[0.5158]	[0.7873]
France	1997–2021	5	4	5.4227	8.6038	12.2821	6.8212	5.2555	0.1525	ULH	FBH	ULH
				[0.0664]	[0.0135]	[0.0022]	[0.0330]	[0.0722]	[0.9266]
Germany	1997–2021	4	3	1.1304	0.6781	0.5231	13.8764	10.7224	7.7361	ELH	ELH	ELH
				[0.5682]	[0.7124]	[0.7698]	[0.0010]	[0.0047]	[0.0209]
India	1997–2021	4	3	0.3871	0.5934	0.4361	13.9121	3.3121	1.5532	ELH	NTH	NTH
				[0.8240]	[0.7433]	[0.8041]	[0.0010]	[0.1909]	[0.4600]
Italy	1997–2021	5	4	9.3207	8.7837	11.6368	4.8423	3.4343	0.3060	FBH	ULH	ULH
				[0.0095]	[0.0124]	[0.0030]	[0.0888]	[0.1796]	[0.8581]
Japan	1997–2021	5	4	6.1104	2.6468	2.9233	12.3493	4.9339	0.7145	FBH	ELH	NTH
				[0.0471]	[0.2662]	[0.2319]	[0.0021]	[0.0848]	[0.6996]
Korea	1997–2021	5	4	8.3072	4.5722	0.4408	22.5276	1.7295	2.2041	FBH	NTH	NTH
				[0.0157]	[0.1017]	[0.8022]	[0.0000]	[0.4212]	[0.3322]
Mexico	1997–2021	5	4	2.9677	5.0294	2.7348	35.1585	10.9703	6.2148	ELH	FBH	ELH
				[0.2268]	[0.0809]	[0.2548]	[0.0000]	[0.0041]	[0.0447]
Russia	1997–2021	5	4	4.3708	6.1147	5.2308	7.0896	3.8707	1.0381	ELH	ULH	ULH
				[0.1124]	[0.0470]	[0.0731]	[0.0289]	[0.1444]	[0.5951]
UK	1997–2021	5	4	5.0067	6.4884	8.0023	10.2634	3.8889	0.2008	FBH	ULH	ULH
				[0.0818]	[0.0390]	[0.0183]	[0.0059]	[0.1431]	[0.9045]
Argentina	1998–2021	4	3	0.4181	0.9190	1.0709	9.6589	5.8972	4.1194	ELH	ELH	NTH
				[0.8113]	[0.6316]	[0.5854]	[0.0080]	[0.0524]	[0.1275]
Brazil	1998–2021	4	3	0.1316	0.2087	0.0488	14.9487	12.9220	6.7944	ELH	ELH	ELH
				[0.9363]	[0.9009]	[0.9759]	[0.0006]	[0.0016]	[0.0335]
EU	1998–2021	5	4	1.9383	1.2038	1.3994	10.1801	1.8315	2.4863	ELH	NTH	NTH
				[0.3794]	[0.5478]	[0.4967]	[0.0062]	[0.4002]	[0.2885]
SA	1997–2021	4	3	1.1936	0.3934	0.9297	22.6177	16.2379	1.2099	ELH	ELH	NTH
				[0.5506]	[0.8214]	[0.6282]	[0.0000]	[0.0003]	[0.5461]
Turkey	1997–2021	4	3	1.1177	1.5933	0.2891	7.7376	8.2884	8.0713	ELH	ELH	ELH
				[0.5719]	[0.4508]	[0.8654]	[0.0209]	[0.0159]	[0.0177]
Indonesia	2001–2021	5	4	0.6189	3.9296	4.5301	8.5089	6.1823	2.5843	ELH	ELH	NTH
				[0.7338]	[0.1402]	[0.1038]	[0.0142]	[0.0455]	[0.2747]

Notes: We present the BC frequency-domain causality test using the Wald test. P-values are reported in []. $H_0:\mathit{\text{USEPU}}\Rightarrow \mathit{\text{EMR}}$ represents the null hypothesis of no Granger causality from international (US) economic policy uncertainty to equity market returns. $H_0:\mathit{\text{EMR}}\Rightarrow \mathit{\text{DEPU}}$ denotes the null hypothesis of no Granger causality from equity market returns to international (US) economic policy uncertainty. Abbreviations: ULH, uncertainty leading hypothesis; ELH, equity leading hypothesis; FBH, feedback hypothesis; NTH, neutrality hypothesis; SR, short-run; IP, intermediate period; LR, long run. K + dmax represents the sum of the optimal lag length and the maximum order of integration. To make a valid model, $k\ge \mathit{\text{dmax}}.$