Economic policy uncertainty and industry portfolio returns in the United States

ABSTRACT This paper examines whether returns on 49 different industry portfolios in the United States (US) expose significantly to the US economic policy uncertainty (EPU) even after controlling for the market and firm-specific risk factors. We find that the US EPU can load significantly against the returns of 15 industry portfolios which include stocks from heavy manufacturing and export dependent industries. However, further asset pricing tests show that the US EPU cannot improve the ability of a benchmark model to capture average industry returns. Additionally, the impact of EPU is time-dependent and significant only during specific periods which are different for each industry. Using a portfolio analysis, we also test whether EPU can forecast future returns. Results imply that the return-EPU relationship is almost flat.