International economic policy uncertainty and stock market returns of Bangladesh: evidence from linear and nonlinear model

This paper explores the relationship between international economic policy uncertainty (EPU) and stock market return of Bangladesh. The study considers economic policy uncertainty of six big trading partners of Bangladesh: US, Canada, EU, China, Russia, and India. We apply time-varying linear (Break-least Square) and non-linear (Markov-Switching) regression approaches by using monthly data from January 2003 to April 2019. Our findings indicate the following. Firstly, The break-least square captured four structural breaks in the capital market of Bangladesh. Secondly, economic policy uncertainty from major importing countries (China and India) affect stock market returns of Bangladesh more significantly than major exporting countries (US and EU). Thirdly, EPU has a greater negative influence on stock returns during high volatility than low volatility regime. A number of policy measures have been recommended. Keywords: economic policy uncertainty (EPU); emerging stock market; contagion; non-linear time-series econometrics