How does economic policy uncertainty comove with stock markets: New evidence from symmetric thermal optimal path method

Abstract

We revisit the dynamic relationship between domestic economic policy uncertainty and stock markets using the symmetric thermal optimal path (TOPS) method. We observe different interaction patterns in emerging and developed markets. Economic policy uncertainty drives the stock market in China, while stock markets play a leading role in the UK and the US. Meanwhile, the lead-lag relationship of the three countries reacts significantly to extreme events. Our findings have important implications for investors and policy makers.