The Role of Economic Policy Uncertainty in Predicting Stock Return Volatility in the Banking Industry: A Big Data Analysis

Abstract

The research aims to study the effects of economic policy uncertainty on the return volatility of stocks with data from the largest banking institutions in Greece. Volatility is constructed using intraday data, whereas the research period extends over a period of about thirteen years, more specifically from January 5, 2001, to June 30, 2014. This period includes various phases of the market, such as stock market crashes along with stock market booms (e.g. the financial crisis of 2007 and 2008 in the United States and the European sovereign debt crisis). The estimated regressions were used to indicate the direct effects of economic policy uncertainty on the return volatility of the stocks of the four large Greek banks. The volatility index is constructed based on intraday data, whereas four different estimators of volatility were used. There is a statistically significant "direct" effect of economic policy uncertainty on the volatility of stock returns of the largest Greek banks, which are (a) Alpha Bank, (b) Eurobank, (c) National Bank of Greece, and (d) Piraeus Bank. Such findings are highly important for specific groups of people, such as investors, policymakers, and regulators. This study is the first research that seeks to identify the effect of economic policy uncertainty on the stock return volatility of the Greek banking system, constructed from intraday data.