Economic Policy Uncertainty and Long-Run Stock Market Volatility and Correlation

We use an extension of the heterogeneous autoregressive model to investigate the influence of time-varying risk aversion and several macroeconomic, financial, and economic policy uncertainty measures on stock market volatility and correlation. Our results indicate strong in-sample and out-of-sample predictive ability of risk aversion and economic uncertainty for the realized stock market volatility. In contrast, variables such as economic policy uncertainty do not provide additional information once we account for risk aversion and economic uncertainty. We also provide evidence of higher economic value and reduced portfolio risk when including risk aversion and economic uncertainty in international portfolio analysis.