Analysis of volatility spread between economic policy uncertainty and developed country stock exchange indices

The interactions among stock indices of developed countries vary based on economic infrastructure and political management styles. Historical events such as pandemics, wars, and economic crises have had significant impacts on the markets. In particular, the US-China trade war has deeply affected the economies of both countries, leading to production constraints, reduced consumption, and price increases. The COVID-19 pandemic has resulted in a slowdown in growth and production. The Russia-Ukraine war, along with the sanctions imposed on Russia, has caused economic losses and altered countries' foreign trade strategies. This study examines the volatility transmission between economic policy uncertainty (EPU) in the US and the stock indices of developed countries. The analysis focuses on the Dow Jones Industrial Average (DJI), DAX, FTSE 100, Nikkei-225, RTS Index (IRTS), and Shanghai Composite (SSEC) indices, using daily data from September 1, 2016, to September 1, 2023, analyzed through the TVP-VAR model. The findings indicate that 50.11% of the changes in the variance of the US EPU Index originate from other stock indices. The IRTS, FTSE 100, and DAX indices emerge as the significant volatility transmitters, while the DJI, NIKKEI-225, SSEC, and the US EPU index are classified as volatility receivers. The DJI is affected by the US EPU by 4.88%, with the SSEC being the least affected index. The IRTS has been identified as the primary volatility transmitter, highlighting the impact of price movements on the US EPU. Overall, increasing economic uncertainties lead to significant market fluctuations and elevate investors' risk perception. In this context, the asymmetric relationships between the US EPU and stock indices represent an important factor that investors must consider in their strategic decision-making processes. Reducing economic uncertainties is critical for market stability and the restoration of investor confidence.