Economic policy uncertainty and Norwegian stock returns : an empirical study of the relation between economic policy uncertainty and stock returns with evidence from the Oslo stock exchange in the period of 1992 - 2019

Abstract

This study investigates if economic policy uncertainty (EPU) is priced in stock returns at the Oslo Stock Exchange (OSE). The analysis is conducted by exploring the linear relationship between exposure to economic policy uncertainty and expected stock returns through the Fama-Macbeth framework. The estimates obtained are controlled for several well-renowned factor pricing models to isolate the policy uncertainty effect. We apply four different methods of capturing economic policy uncertainty to increase the robustness of the analysis. This includes measures based on (i) print newspaper articles, (ii) online newspaper articles, (iii) Google searches and (iv) a firm-specific measure obtained by applying textual analysis to annual reports. We do not find evidence of a negative linear relationship between economic policy uncertainty and expected stock returns. The extreme portfolios sorted by EPU exposure do not obtain significantly different return spreads. When controlling for the CAPM and the multi-factor models in context of the Fama-Macbeth framework, our portfolios obtain insignificant risk premia estimates associated with economic policy uncertainty. However, we do obtain significant estimates at one sorting method for two model specifications when applying the Google search-based measure of economic policy uncertainty. Nevertheless, the evidence is considered too limited for economic policy uncertainty to acquire status as a systematic risk factor in Norwegian stock returns.