The Asset Pricing Implications of Economic Policy Uncertainty on the German Stock Market

Thumbnail Image

Files

bachelor_Sonninen_Essi_2025.pdf (1023.33 KB)

URL

Journal Title

Journal ISSN

Volume Title

School of Business | Bachelor's thesis
Unless otherwise stated, all rights belong to the author. You may download, display and print this publication for Your own personal use. Commercial use is prohibited.

Authors

Date

2025

Department

Rahoituksen laitos

Major/Subject

Mcode

Degree programme

Rahoitus

Language

en

Pages

27+2

Series

Abstract

This thesis investigates how economic policy uncertainty (EPU) affects asset pricing in the German stock market. Using monthly EPU-index (Baker, Bloom & Davis, 2016) from 1993 to 2024 and methodology inspired by Brogaard and Detzel (2015), I examine the explanatory power of the German EPU index for both realized volatility and log excess returns. The results show that EPU does not consistently explain realized volatility unless interacted with economic conditions, suggesting its impact is state-dependent. EPU has inconsistent relationship with contemporaneous returns but emerges as a robust predictor of future excess returns, particularly over longer horizons. These findings indicate that EPU may command a risk premium in the German market, although its effects are more muted and context-sensitive compared to U.S.-based evidence. Overall, the results support the idea that EPU is a partially priced risk factor, especially through its role in return forecasting.

Description

Thesis advisor

Matti Keloharju, Matti Keloharju

Keywords

economic policy uncertainty, EPU, asset pricing, German stock market, volatility, risk premium, return predictability, German EPU-index

Other note

Citation

Permanent link to this item

https://urn.fi/URN:NBN:fi:aalto-202505183748

Collections

[kand] Kauppakorkeakoulu / BIZ (Open Access)