Economic policy uncertainty, short-term reversals, and investor sentiment

Abstract

This study finds that the predictability of economic policy uncertainty on short-term reversals is stronger among stocks exposed more to the volatility index (VIX) and economic policy uncertainty index (EPU). In addition, the predictability of VIX on short-term reversals is stronger among stocks exposed more to this index and the Aruoba-Diebold-Scotti business conditions index (ADS). Furthermore, the finding is robust after controlling for the other popular investor sentiment indexes, the Fama-French five risk factors, financial crises, and firm size.