Economic Policy Uncertainty and Stock Market: Evidence from Korea

This study examines a dynamics between a new uncertainty measure developed by Baker et al. (2016), the Korean economic policy uncertainty (EPU) index, and various stock market and macroeconomic variables such as KOSPI returns, trading volumes, the economic sentiment index, and so on. Since asset prices are sensitive to the policy or government-related issues, the policy uncertainty is expected to play an important role in the behaviors of economic variables. Using monthly stock market and macroeconomic data over the sample period from January 2003 to December 2016, we find that the Korean EPU index is positively correlated with the VKOSPI (i.e., the volatility measure), but the contemporaneous correlation with the KOSPI returns is negative, implying that high uncertainty would be negatively considered in the stock market. Among various macroeconomic variables, the economic sentiment index is negatively correlated with the Korean EPU, and its magnitude is economically and statistically significant. However, the lead-lag effects between the Korean EPU and other economic variables are generally weak except for the VKOSPI.