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Economic policy uncertainty and investors' sentiment—an Indian perspective

Sohil Idnani (Department of Economics, FLAME University, Pune, India)
Masudul Hasan Adil (Humanities and Social Sciences-Economics, Indian Institute of Technology Palakkad, Palakkad, India)
Hoshiar Mal (Department of Operations and Analytics, FLAME University, Pune, India)
Ashutosh Kolte (Department of Management Sciences (PUMBA), Savitribai Phule Pune University, Pune, India)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 26 October 2021

Issue publication date: 21 November 2023

464

Abstract

Purpose

This paper aims to understand the effect of a change in Economic Policy Uncertainty (EPU) of India and the USA on investors' sentiment in the Indian context, consisting of Sensex returns and volatility index (Vix).

Design/methodology/approach

The authors employ bounds testing approach to cointegration to capture the short-and long-run effects of EPU on investors' sentiment, along with impulse response functions and variance decompositions to check the effect of a shock on Sensex and Vix.

Findings

The study concludes the existence of a cointegrating relationship for both models, that is, Vix and Sensex. In the long-run, changes in EPU_India affect Vix and Sensex positively and negatively, respectively. On the other hand, EPU_USA affects Vix and Sensex positively. Furthermore, Gregory and Hansen (1996) cointegration with endogenous structural break reveals a long-run cointegrating relationship for both models.

Research limitations/implications

The effect of EPUs on investors' sentiment reveals that when there is an uncertain event that adversely affects the stock prices, investors should not make haste to take a decision as the impact on stock prices perturbation might be temporary. Therefore, one should persevere for the dip in prices to hit the desired target.

Originality/value

Various studies look at the effect of cross-country EPU on the home country, However, there is no such study in the Indian context. The present study examines the impact of India's EPU on investors' sentiments after controlling the USA's EPU, one of India's largest trading partners and a key determinant of global economic policy.

Keywords

Citation

Idnani, S., Adil, M.H., Mal, H. and Kolte, A. (2023), "Economic policy uncertainty and investors' sentiment—an Indian perspective", International Journal of Emerging Markets, Vol. 18 No. 10, pp. 3462-3485. https://doi.org/10.1108/IJOEM-04-2021-0567

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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