Economic policy uncertainty and stock markets: empirical evidence for the case of Spain

This paper studies the relationship between stock prices (represented by the IBEX35, which is the benchmark stock market index in Spain) and uncertainty, measured jointly through three perspectives: economic policy (EPU), financial markets (VIX) and geopolitical risks (GPR) at the global level. For this purpose, monthly data for the period February 1999-December 2018 of a series of financial and macroeconomic variables are used. As a methodology, a cointegration approach is applied, namely an ARDL model. The results obtained reveal that there is no uniform effect of uncertainty on stock prices. More specifically, a greater perception of uncertainty in economic policy and/or volatility in the equity markets will lead to decreases in the returns on the IBEX 35 quotes, with the second of the two factors mentioned having a greater impact, both in the short and long term. However, geopolitical risks do not show any significant impact on Spanish quotes.