Stock Market Returns and Economic Policy Uncertainty-An Indian Perspective

The proposed paper attempts to investigate the impact of economic policy uncertainty (EPU) on stock market returns. Policy uncertainty can hamper economic growth by slowing down the inflow of investments. Investors are reluctant to take investment decisions when they perceive uncertainty related to government policy. Vector Auto-Regression (VAR) analysis is used to show how the stock market returns respond to EPU shocks. An Impulse Response Function (IRF) is estimated that traces out the response of the dependent variable (stock market returns) to shocks in the error terms. The stock market returns are estimated from the values of the BSE SENSEX and policy uncertainty values from the EPU Index (Baker, Bloom and Davies 2012)2. The data spans from April 2004 until March 2016. This paper seeks to contribute to understand the role of policy uncertainty in the capital market from the Indian perspective and would be relevant to the practitioners in forecasting equity returns.