Economic Policy Uncertainty and Stock Market Dynamics in India: Evidence from a Nonlinear Framework

The study examines the asymmetric relationship between economic policy uncertainty (EPU) and the Indian stock market in the presence of a structural break that is induced by the COVID-19 pandemic. The study employed the non-linear autoregressive distributed lag (NARDL) model to examine the asymmetric impact of economic policy uncertainty (EPU) on the Indian stock market using monthly data from 2003M1 to 2025M01. The study also employed the Chow breakpoint test to detect structural breakdowns caused by the COVID-19 pandemic. The study also used the BDS test to assess the nonlinearity of the variables and the Wald test to examine long and short-run asymmetry. The study reveals a significant asymmetric relationship between economic policy uncertainty (EPU) and the Indian stock market. The results reveal significant short-run and long-run asymmetries in the relationship between economic policy uncertainty and stock market performance, indicating that the market responds differently to positive and negative uncertainty shocks. The rising EPU negatively impacts stock prices, while the declining EPU has a more substantial positive effect in the long run. On the other hand, in the short run, rising EPU has a significantly negative contemporaneous effect on stock prices, whereas falling EPU has no contemporaneous impact. Furthermore, the COVID-19 structural break significantly affected the stock market only in the short run, with little long-term impact.