Relative Impact of Global and Country Specific Uncertainties on Stock Market Returns

Abstract

This research attempts to uncover the following important relationships: (i) what is the relative impact of global and country specific economic uncertainties on stock market returns of the U.S., U.K. France, Germany, and Japan? (ii) What are the duration of these impacts (if any) i.e., how long does the impact of global and country specific uncertainties on stock returns lasts? It employs the time series data obtained in monthly interval during 1997-2015 on the economic uncertainties and stock market returns for the U.S., U.K., France, Germany, and Japan. The findings of the impulse response functions generated from a ten variable VAR model suggest the following: (i) consistent with existing research there is a strong negative relationship between economic uncertainty with stock market returns i.e., an increase in economic uncertainty depresses the stock prices in case of all five countries in the sample (ii) there is a significant impact of local uncertainty on stock prices in all the cases (iii) the global uncertainties which have significantly high impact on foreign country’s markets mainly seems to stem from the U.S. and Germany (iv) the impact of local uncertainty is higher in case of U.S. and Germany while the impact of global uncertainty is higher in case of U.K., France, and Japan