Riding or challenging the waves: Uncovering the volatility of Southeast Asian stock markets amidst global uncertainties

The purpose of this study is to examine the effect of global economic uncertainty on the stock markets in four developing countries in Southeast Asia, namely Indonesia (JKSE), Malaysia (KLCI), Thailand (SETI), and Vietnam (VNI). The study uses the U.S., China, and Europe Economic Policy Uncertainty (EPU) indices and the CBOE Volatility Index (VIX) from the Chicago Board Options Exchange as proxies for global uncertainty. By analyzing monthly composite stock index return rates in each stock market and monthly percentage changes in both the EPU and VIX, the Vector Auto-Regressive (VAR) model demonstrates that increases in the US EPU negatively impact JKSE, KLCI, and SETI return rates, while VNI tends to respond positively. Increases in EPU in China and Europe tend to have a negative effect on all stock markets. However, the impact of the Chinese EPU was stronger than that of the European EPU, particularly in JKSE and SETI, and the KLCI was more sensitive to the European EPU shock. On the other hand, the effect of an increase in the VIX was comparable to the impact of the US EPU, with JKSE, KLCI, and SETI experiencing negative pressure, while VNI responded positively.