Page 274 - Contributed Paper Session (CPS) - Volume 6

CPS1929 Takayuki M.

Economic Policy Uncertainty and Financial
Market Volatility: Evidence from Japan
Takayuki Morimoto
Kwansei Gakuin University, Sanda, Japan

Abstract
In this study, we show a relationship between economic policy uncertainty and
financial market volatility in Japanese financial market. Uncertainty is
measured by the index of economic policy uncertainty (EPU) based on
newspaper coverage, frequency newly developed by Baker et al. Volatility is
calculated as a sum of squared intraday returns, which is known as the realized
volatility (RV). The EPU and RV are combined with the mixed data sampling
(MIDAS) approach in order to investigate how economic policy uncertainty
shocks are associated with the Japanese financial market volatility. The result
will contribute to financial market research and economic policy studies.

Keywords
Economic policy uncertainty index; Realized volatility; GARCH-MIDAS model;
DCC-MIDAS model; Japanese financial market

1. Introduction
Asgharian et al. (2016) investigate US and UK stock market movements
using the economic policy uncertainty indices of Baker et al. (2016) in
combination with the mixed data sampling (MIDAS) approach. They find that
the long-run US-UK stock market correlation depends positively on US
economic policy uncertainty shocks while the US long-run stock market
volatility depends significantly on the US economic policy uncertainty shocks
but not on UK shocks while the UK depends significantly on both.
In this research, we follow Asgharian et al. (2016) and apply their method
to Japanese stock market. Specifically, we investigate the relation between
Nikkei225 which is the stock index for the Tokyo Stock Exchange (TSE) and
individual stocks comprised in TOPIX100 which is composed of Top 100 stocks
traded on TSE in light of economic policy uncertainty and stock market
volatility. Uncertainty is measured by the index of economic policy uncertainty
(EPU) based on newspaper coverage, frequency newly developed by Baker et
al. (2016) Volatility is calculated as a sum of squared intraday returns, which is
known as the realized volatility (RV). The EPU and RV are combined with the
mixed data sampling (MIDAS) approach proposed by Ghysels et al. (2004,
2006) in order to investigate how economic policy uncertainty shocks are
associated with the Japanese financial market volatility.

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