EPU spillovers and stock return predictability: A cross-country study

•This paper applies the high-dimensional factor-copula model to estimate EPU spillovers as expected probability in distress (EPD).•This paper examines the effect of EPU spillovers on stock returns across 23 global markets.•This paper finds EPD significantly and negatively predicts country-level returns in global markets.•Return predictability through the spillover channel is highly significant and dominates that through the domestic channel.•The results are robust to various model specifications and alternative measures of EPU spillovers. Inspired by interconnectedness of economic policy uncertainty (EPU) across countries, this paper applies the high-dimensional factor-copula model to estimate EPU spillovers as expected probability in distress (EPD) and examines its effect on stock returns across 23 global markets. We find that EPD significantly and negatively predicts country-level returns in global markets. The predictability is significant for both countries in developed markets and countries in emerging markets by EPD that primarily originates from developed markets. Moreover, return predictability through the spillover channel is highly significant under various market conditions and dominates that through the domestic channel. The spillover effect remains strongly significant after the financial crisis, reflecting increased interconnectedness of the post-crisis global markets. Our results are robust to various model specifications and alternative measures of EPU spillovers.