The effects of economic policy uncertainty on stock market returns: Evidence from Brazil

• Published in: Revista Brasileira de Finanças Vol. 19; no. 3; pp. 53 - 84
• Main Authors: Gea, Cristiane, Vereda, Luciano, Figueiredo Pinto, Antonio Carlos, Klotzle, Marcelo Cabus
• Format: Journal Article
• Language: English
• Published: Rio de Janeiro Sociedade Brasileira de Finanças 01-09-2021
• Subjects: Decision making; Dividends; Economic activity; Economic policy; Economic recovery; Employment; GDP; Gross Domestic Product; Interest rates; Investments; Political risk; Political systems; Rates of return; Recessions; Securities markets; Stock exchanges; Stock prices; Volatility; United States > US
• ISSN: 1679-0731; 1984-5146
• DOI: 10.12660/rbfin.v19n3.2021.83014

This article investigates the effects of economic policy uncertainty on the Brazilian stock market. We link excess returns and dividend growth rates to the economic policy uncertainty index of Baker et al. (2016) and other control variables. In recent years, Brazil has experienced political tensions, which affected its economic policy. Therefore, this country is the most suitable environment to test the hypothesis that this measure of economic policy uncertainty has an informational content not wholly reflected in the usual constructs of economic uncertainty and economic distress. Our results show that economic policy uncertainty (i) correlates negatively with current excess stock returns; (ii) correlates positively with future excess stock returns, showing itself to be a good predictor of future performance of the stock market; (iii) is not significantly related to future dividend growth rates; and (iv) anticipates changes in discount rates.