A Note on the Transmission of Policy Uncertainty Shocks on Asia-Pacific Stock Returns

Abstract

This study explores the transmission of various policy uncertainty shocks—such as financial market uncertainty (using the Chicago Board Options Exchange Volatility Index), macroeconomic policy uncertainty (using the Global Economic Policy Uncertainty), and anthropogenic uncertainty (using geopolitical risks)—to Asia-Pacific country (APC) stock returns. We adapt a homogeneous panel vector autoregressive model for the distinct analysis of emerging and advanced APCs. Our major findings are that 1) APC stocks are vulnerable to financial and macroeconomic policy uncertainty shocks but less affected by geopolitical risks and 2) the negative impacts of policy uncertainty indicators are greater and longer lasting in advanced APCs than in emerging APCs. The more resilient emerging APC stocks have diversification benefits for investors. Our findings are robust to considerations of nominal and real stock returns.