The Effects of Economic Policy Uncertainty on Common Stock and American Depository Receipts

Uncertainty can have profound implications on both firms and individuals who hope to optimally make decisions in their best interest. In this research, I seek to examine the impact that economic policy uncertainty has on domestic and foreign stock. In particular, I take a market microstructure perspective focused on stock liquidity and volatility measures in response to changes in economic policy uncertainty. Understanding the directional flow of economic policy uncertainty and the magnitude of the consequences at home and abroad can both help prepare agents to make good decisions about the future and exhort policy makers to be more efficient in their political activity which often has a global effect. In lieu of using foreign stocks on global markets, I use American Depository Receipts from companies abroad to compare with US common stock sold in American markets. Primarily, ADRs from Great Britain will be considered. Uncertainty for each country is captured by the Economic Policy Uncertainty Index from the seminal paper by Baker, Bloom, and Davis (2016). Historical market data is collected from the Center for Research in Security Prices and Compustat spanning 19 years from 1997 until 2016. I estimate multivariate time series using a vector autoregressive framework to assess the impact of an innovation in economic policy uncertainty on liquidity variables of each country. Both Granger causality and impulse response will be considered. It will be shown that economic policy uncertainty has negative effects on liquidity from EPU shocks originating in the securities country of origin. ADRs look more attractive, however, with a USA EPU shock as liquidity worsens in US common stock