Abstract

This study examines the effects of economic policy uncertainty (EPU) on three dimensions of financial market dynamics—stock market returns, stock market volatility, and exchange rate volatility—across 15 G20 economies over the period 2006 Q1–2024 Q4. Employing a rigorous second-generation panel econometric framework that accounts for cross-sectional dependence and slope heterogeneity, we apply the Common Correlated Effects Mean Group (CCEMG) and Augmented Mean Group (AMG) estimators as primary estimators, complemented by cross-sectionally augmented ARDL (CS-ARDL) for short- and long-run dynamics and the Method of Moments Quantile Regression (MMQR) for distributional analysis. EPU is significantly associated with lower stock market returns, particularly in advanced economies and at lower quantiles of the return distribution. The impact of EPU on stock market volatility is not strong for mean-based estimators even when global uncertainty (VIX) is controlled for, and global fear dominates domestic policy uncertainty as a driver of volatility. Exchange rate volatility is positively and significantly associated with EPU, particularly in higher-volatility regimes. Subgroup analysis shows that EPU–return effects are stronger in advanced economies, but EPU–exchange rate volatility responses are stronger in emerging markets. These results have important implications for portfolio allocation, hedging strategies and macroprudential policy decisions in G20 economies.

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