Asymmetric nexus between economic policy uncertainty and the Indian stock market: Evidence using NARDL approach

Abstract

This study examines linkages between the stock market and uncertainty in the real economy generated by unpredictability of economic policies. We investigate the asymmetric effect of economic policy uncertainty (EPU) on India’s stock market performance through the non-linear autoregressive distributed lag (NARDL) approach for the period ranging from 2003 to 2022. A sub-sample analysis of the pre-covid period is also done to confirm that EPU had an impact on the stock market even prior to the pandemic. Our findings support the existence of asymmetry in the variables as the stock prices’ response to rising and declining EPU is not identical in both sample periods. It is observed that falling EPU’s positive impact on stock prices is greater than rising EPU’s adverse impact. The study suggests that government officials and policymakers must ensure consistency in policymaking and prevent the adverse effects of EPU as it impedes the long-term development of the securities market.