Spillover Effect of Economic Policy Uncertainty on the Stock Market in the Post-Epidemic Era

ABSTRACT

In the post-epidemic era, global economic policies have been uncertain and the stock market has been volatile. It is crucial to investigate the spillover effect of economic policy uncertainty (EPU) on the stock market for accurately hedging risks and seizing recovery opportunities. This paper applies the DY spillover index and network analysis to study the spillover effect between the U.S. EPU and the U.S. and Asian stock markets. The empirical results show a significant spillover effect in both the U.S. and Asian stock markets, with EPU as the recipient of risk spillover and stock indices as the transmitters. The stock markets in Japan and South Korea react more strongly to shifts in the U.S. EPU. All transmitters attain their maximum values in both the TO and FROM directions in 2020. The from-direction spillover indices of the U.S. stock market are less volatile in 2020 than those of the Asian stock market, indicating that the outbreak of the COVID-19 epidemic has a greater impact on the Asian stock market than the U.S. stock market. These conclusions have substantial implications for asset management, investment diversification and aversion to unsystematic risk in major economic shocks.