How Economic Policy Uncertainty Drives Long-term Industry Beta: Evidence from North America
Authors: Akber Salauddin Mohammad , Akash Mohammad Ashad Ull Haque , Nusrat Akter  , Roy Aditi , Afrin Tanzina 
Published: December 2023

Purpose: This study aims to evaluate the nature of the relationship between economic policy uncertainty and industry beta and the cross-sectional heterogeneity between them.

Theoretical Framework: Industry Return is derived from the annual market capitalization of each industry by taking a summation of all firms' market capitalization values to find out the industry beta variable. The categorization of 48 industries according to the Fama-French model has been defined as the industry in this study. The main explanatory variable for this research strategy is the Economic Policy Uncertainty or the EPU. Economic policy uncertainty is measured based on the given index by Baker, Bloom, and David index. Baker, Bloom, and Davis, or BBD, perceive that there are different manners by which the economic policy uncertainty can be evolved. For instance, economic policy uncertainty can be influenced by what different types of discussions related to economic policies are going to be undertaken. BBD has tried looking into the landscape regarding the economic policy uncertainty overall through the eyes of newspapers based in the USA. In addition, there has been textual analysis by Baker, Bloom, and Davis or BBD over different types of digital archives for the top 10 U.S. newspapers for obtaining the count of articles on a monthly basis for every newspaper so that they can be able to focus on the specific economic policy uncertainty.

Methodology: Positivist research philosophy has been implicated in conducting this research study. From the research approach perspective, the deductive research approach has been implemented. In addition, a quantitative research strategy has been used for modeling purposes and explanation. Furthermore, an experimental research design has been incorporated into this research strategy. The required data set has been gathered from secondary sources, including the WRDS and BBD databases. Industry return has been calculated based on industry market capitalization. From a modeling perspective, a baseline time series regression model has been incorporated. In this research conduction, there has been an analysis of 10 U.S. industries. The time span is from 2000 to 2020. In addition, there has been an analysis of different policy uncertainties based on the decomposition of EPU.

Results & Conclusion: First, the impact of the economic policy uncertainty in the combined form on the industry-level betas has been analyzed. In this case, the entire time scale of 19 years has been divided into three classes: the financial turmoil period from 2001 to 2006, the financial turmoil period from 2007 to 2010, and finally, the financial turmoil period from 2011 to 2020. It has been pointed out that overall, there has been a statistically significant positive impact of economic policy uncertainty on industry level-betas mostly on all industries. In addition, when there has been a decomposition of the economic policy uncertainty index, a statistically significant positive association has been found regarding monetary policy uncertainty and fiscal policy uncertainty.

Originality: The significance of this research is that there has been a one-to-one relationship finding on the impact of EPU on industry-level beta. Very few literatures have covered this issue broadly. One notable literature on this topic was conducted by Yu et al. in 2017. However, this research study has analyzed another ten industries in North America that have not been previously analyzed. In addition, for deep insight, the research framework has been divided into three parts: overall period analysis, pre-financial crisis turmoil, and post-financial crisis turmoil periods. In addition, there has been an analysis of the impact of component-wise seven policy uncertainty index on industry-level beta.

Contribution: Different factors, including macroeconomic phenomena, can influence industry-level beta or systematic risk. In recent times, economic policy uncertainty analysis has become inevitable for measuring the policy implications and their impacts on industry-level risk to determine their dynamics. The relationship between the economic policy uncertainty index and the industrial structural model of risk dynamics has been established by this research study.