Pandemic-induced economic policy uncertainty and US stock exchanges

Area of Science:

• * Financial Economics
• * Econometrics
• * Public Health

Background:

• * Economic policy uncertainty (EPI) significantly influences financial markets.
• * Pandemics introduce unique and substantial economic policy uncertainties.
• * Existing research lacks a comprehensive measure for pandemic-specific EPI and its market impacts.

Purpose of the Study:

• * To investigate the impact of pandemic-induced economic policy uncertainties (PIEPU) on major stock market indexes.
• * To introduce and utilize the novel Infectious Disease Equity Market Volatility (IDEMV) index, also referred to as the PIEPU index.
• * To differentiate the impact of general PIEPU from COVID-19 specific PIEPU (DCOVPIEPU) on stock returns.

Main Methods:

• * Application of the Autoregressive Distributed Lag (ARDL) model.
• * Employing the Toda and Yamamoto causality test.
• * Analysis of data spanning from 2009 to 2020, incorporating the IDEMV index.

Main Results:

• * Increases in the PIEPU index led to decreases in the S&P500 and Dow Jones indexes.
• * The Nasdaq-100 index showed no significant negative response to rising PIEPU.
• * The DCOVPIEPU index demonstrated a more pronounced negative impact on the S&P500 and Dow Jones compared to the general PIEPU index.

Conclusions:

• * Pandemic-induced economic policy uncertainties pose a significant risk to specific stock market indexes.
• * The tech-heavy Nasdaq-100 may exhibit resilience to pandemic-related economic uncertainty.
• * The severity and spread of a pandemic directly correlate with the magnitude of negative stock market impacts, as evidenced by COVID-19's effect.