Multiscale relationship between economic policy uncertainty and sectoral returns: Implications for portfolio management

Citation

Rababa’a ARA, Alomari M, Rehman MU, McMillan D & Hendawi R (2022) Multiscale relationship between economic policy uncertainty and sectoral returns: Implications for portfolio management. Research in International Business and Finance, 61, Art. No.: 101664. https://doi.org/10.1016/j.ribaf.2022.101664

Abstract
This study examines the multiscale links between economic policy uncertainty (EPU) and sectoral stock returns in China, India, the UK, and the US. We find that the impact of domestic EPU on sectoral returns persists at low frequencies and over the full sample period, especially in the financial sectors of China, the UK, and the US. The combined impact of domestic and US EPU endures the longest in the UK and China over a 16–32 month horizon. We also observe a high Sharpe ratio (low Value-at-Risk; VaR) in the presence of considerable US EPU that flips across sectors. During rising US EPU, the portfolio optimization exercise suggests weighting Chinese and Indian sectors higher. Finally, the VaR exercise produces identical portfolio diversification benefits in the equally weighted global and China stocks portfolios.

Keywords
Wavelet coherence; Economic policy uncertainty; Sectoral returns; Value at risk; Sharpe ratio

Journal
Research in International Business and Finance: Volume 61

• Accepted manuscript