On the different impact of local and national sources of policy uncertainty on sectoral stock volatility

Abstract

We analyze the impact of state-level and national-level economic policy uncertainty (EPU) on stock volatility across 17 sectors. Using EPU data from 46 U.S. states, we construct a local uncertainty index through principal component analysis and compare it with national uncertainty using quantile regression. Our findings indicate that banks are influenced by both local and national uncertainty. Consumer-related sectors, such as beverages and transportation, react more to local uncertainty, while healthcare and defense sectors respond to national uncertainty. Sectors like medical, technology, electricity, and chemicals show no significant impact from either source. The effects are more pronounced at the 75th quantile, suggesting greater impact during high volatility periods. Our results provide important evidence that a generalized policy may not be effective as sectors respond differently to various sources of uncertainty. Instead, policymakers should combine national level policies with sector-specific approaches.