Hostname: page-component-7b7567c8c-7pwfn Total loading time: 0 Render date: 2026-11-14T20:41:36.656Z Has data issue: false hasContentIssue false
  • English
  • Français

Measuring “State-Level” Economic Policy Uncertainty

Published online by Cambridge University Press:  13 June 2023

Redouane Elkamhi,
Chanik JoOpen the ORCID record for Chanik Jo[Opens in a new window] and
Marco Salerno
Redouane Elkamhi
Affiliation:
University of Toronto, Rotman School of Management redouane.elkamhi@rotman.utoronto.ca
Chanik Jo*
Affiliation:
The Chinese University of Hong Kong, CUHK Business School
Marco Salerno
Affiliation:
Healthcare of Ontario Pension Plan Trust Fund msalerno@hoopp.com
*
chanikjo@cuhk.edu.hk (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the 'Save PDF' action button.

We develop 50 indices of state-level economic policy uncertainty (SEPU) based on newspaper coverage frequency using 204 million newspaper articles from Mar. 1984 to Dec. 2019. We assess the validity of our measures. Our SEPU indices vary counter-cyclically with respect to state-specific economic conditions, rise before close gubernatorial elections, and exhibit a large cross-sectional variation. We demonstrate that SEPU indices are associated with the cross-sectional variation in state-level GDP, employment, income as well as industry investment decisions. Our findings highlight the importance of economic policy uncertainty at the state level in addition to the nationwide level.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 7 , November 2024, pp. 3230 - 3266
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Pat Akey, Hendrik Bessembinder (the editor), Jonathan Brogaard and Art Durnev (the referees), Charles Martineau, and Tom McCurdy as well as seminar participants at the University of Toronto for helpful comments and suggestions. We are grateful to Jad Izgua, Jingkai Xu, and Lorna Zhong for their excellent research assistance. Any errors or omissions are our own responsibility. Our indices are available on Chanik Jo’s website at https://chanikjo.github.io/Research.

References

Agarwal, V.; Aslan, H.; Huang, L.; and Ren, H.. “Political Uncertainty and Household Stock Market Participation.” Journal of Financial and Quantitative Analysis, 57 (2022), 1–30.CrossRefGoogle Scholar
Akey, P., and Lewellen, S.. “Policy Uncertainty, Political Capital, and Firm Risk-Taking.” Working Paper, University of Toronto (2017).CrossRefGoogle Scholar
Alexopoulos, M., and Cohen, J.. “The Power of Print: Uncertainty Shocks, Markets, and the Economy.” International Review of Economics and Finance, 40 (2015), 8–28.CrossRefGoogle Scholar
Almazan, A.; de Motta, A.; Titman, S.; and Uysal, V.. “Financial Structure, Acquisition Opportunities, and Firm Locations.” Journal of Finance, 65 (2010), 529–563.CrossRefGoogle Scholar
Arellano, C.; Bai, Y.; and Kehoe, P. J.. “Financial Frictions and Fluctuations in Volatility.” Journal of Political Economy, 127 (2019), 2049–2103.CrossRefGoogle Scholar
Atanassov, J.; Julio, B.; and Leng, T.. “The Bright Side of Political Uncertainty: The Case of R&D.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2648252 (2015).CrossRefGoogle Scholar
Autor, D. H.; Dorn, D.; and Hanson, G. H.. “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” American Economic Review, 103 (2013), 2121–2168.CrossRefGoogle Scholar
Azzimonti, M. “Partisan Conflict and Private Investment.” Journal of Monetary Economics, 93 (2018), 114–131.CrossRefGoogle Scholar
Bachmann, R., and Bayer, C.. “‘Wait-and-See’ Business Cycles?” Journal of Monetary Economics, 60 (2013), 704–719.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Investor Sentiment and the Cross-Section of Stock Returns.” Journal of Finance, 61 (2006), 1645–1680.CrossRefGoogle Scholar
Baker, S.; Bloom, N.; and Davis, S. J.. “Measuring Economic Policy Uncertainty.” Quarterly Journal of Economics, 131 (2016), 1593–1636.CrossRefGoogle Scholar
Baker, S. R.; Bloom, N.; Canes-Wrone, B.; Davis, S. J.; and Rodden, J.. “Why Has US Policy Uncertainty Risen Since 1960?” American Economic Review, 104 (2014), 56–60.CrossRefGoogle Scholar
Baker, S. R.; Bloom, N.; and Terry, S. J.. “Using Disasters to Estimate the Impact of Uncertainty.” Review of Economic Studies, forthcoming (2023).Google Scholar
Baker, S. R.; Davis, S. J.; and Levy, J. A.. “State-Level Economic Policy Uncertainty.” Journal of Monetary Economics, 132 (2022), 81–99.CrossRefGoogle Scholar
Bali, T. G.; Brown, S. J.; and Tang, Y.. “Is Economic Uncertainty Priced in the Cross-Section of Stock Returns?” Journal of Financial Economics, 126 (2017), 471–489.CrossRefGoogle Scholar
Bali, T. G.; Subrahmanyam, A.; and Wen, Q.. “The Macroeconomic Uncertainty Premium in the Corporate Bond Market.” Journal of Financial and Quantitative Analysis, 56 (2021), 1653–1678.CrossRefGoogle Scholar
Basu, S., and Bundick, B.. “Uncertainty Shocks in a Model of Effective Demand.” Econometrica, 85 (2017), 937–958.CrossRefGoogle Scholar
Becker, B.; Ivković, Z.; and Weisbenner, S.. “Local Dividend Clienteles.” Journal of Finance, 66 (2011), 655–683.CrossRefGoogle Scholar
Bekaert, G.; Engstrom, E. C.; and Xu, N. R.. “The Time Variation in Risk Appetite and Uncertainty.” Management Science, 68 (2022), 3975–4004.CrossRefGoogle Scholar
Benhabib, J.; Liu, X.; and Wang, P.. “Endogenous Information Acquisition and Countercyclical Uncertainty.” Journal of Economic Theory, 165 (2016), 601–642.CrossRefGoogle Scholar
Bernanke, B. S. “Irreversibility, Uncertainty, and Cyclical Investment.” Quarterly Journal of Economics, 98 (1983), 85–106.CrossRefGoogle Scholar
Bernile, G.; Bhagwat, V.; and Rau, P. R.. “What Doesn’t Kill You Will Only Make You More Risk-Loving: Early-Life Disasters and CEO Behavior.” Journal of Finance, 72 (2017), 167–206.CrossRefGoogle Scholar
Bernile, G.; Kumar, A.; and Sulaeman, J.. “Home Away from Home: Geography of Information and Local Investors.” Review of Financial Studies, 28 (2015), 2009–2049.CrossRefGoogle Scholar
Besley, T., and Case, A.. “Does Electoral Accountability Affect Economic Policy Choices? Evidence from Gubernatorial Term Limits.” Quarterly Journal of Economics, 110 (1995), 769–798.CrossRefGoogle Scholar
Bhamra, H. S.; Uppal, R.; and Walden, J.. “The Geography of Beliefs.” Working Paper, INSEAD, available at https://sites.insead.edu/facultyresearch/research/file.cfm?fid=65677&p% (2019).Google Scholar
Białkowski, J.; Dang, H. D.; and Wei, X.. “High Policy Uncertainty and Low Implied Market Volatility: An Academic Puzzle?” Journal of Financial Economics, 143 (2022), 1185–1208.CrossRefGoogle Scholar
Bird, A.; Karolyi, S. A.; and Ruchti, T.. “How Do Firms Respond to Political Uncertainty? Evidence from U.S. Gubernatorial Elections.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2986678 (2017).Google Scholar
Black, F. “Studies of Stock Price Volatility Changes.” In Proceedings of the Business and Economic Statistics Section, Washington, DC: American Statistical Association (1976), 177–181.Google Scholar
Bloom, N. “The Impact of Uncertainty Shocks.” Econometrica, 77 (2009), 623–685.Google Scholar
Bloom, N.; Bond, S.; and Reenen, J. V.. “Uncertainty and Investment Dynamics.” Review of Economic Studies, 74 (2007), 391–415.CrossRefGoogle Scholar
Bloom, N.; Floetotto, M.; Jaimovich, N.; Saporta-Eksten, I.; and Terry, S. J.. “Really Uncertain Business Cycles.” Econometrica, 86 (2018), 1031–1065.CrossRefGoogle Scholar
Bloom, N.; Handley, K.; Kurman, A.; and Luck, P.. “The Impact of Chinese Trade on U.S. Employment: The Good, The Bad, and The Debatable.” Working Paper, Stanford University (2019).Google Scholar
Boudoukh, J.; Feldman, R.; and Kogan, S.. “Which News Moves Stock Prices? A Textual Analysis.” Working Paper, NBER (2013).CrossRefGoogle Scholar
Brogaard, J., and Detzel, A.. “The Asset-Pricing Implications of Government Economic Policy Uncertainty.” Management science, 61 (2015), 3–18.CrossRefGoogle Scholar
Caldara, D., and Iacoviello, M.. “Measuring Geopolitical Risk.” American Economic Review, 112 (2022), 1194–1225.CrossRefGoogle Scholar
Caliendo, L.; Parro, F.; Rossi-Hansberg, E.; and Sarte, P.-D.. “The Impact of Regional and Sectoral Productivity Changes on the U.S. Economy.” Review of Economic Studies, 85 (2018), 2042–2096.CrossRefGoogle Scholar
Campbell, J. Y., and Cochrane, J. H.. “By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior.” Journal of Political Economy, 107 (1999), 205–251.CrossRefGoogle Scholar
Carroll, C. D., and Samwick, A. A.. “How Important is Precautionary Saving?” Review of Economics and Statistics, 80 (1998), 410–419.CrossRefGoogle Scholar
Çolak, G.; Durnev, A.; and Qian, Y.. “Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections.” Journal of Financial and Quantitative Analysis, 52 (2017), 2523–2564.CrossRefGoogle Scholar
Chhaochharia, V.; Korniotis, G. M.; and Kumar, A.. “Prozac for Depressed States? Effect of Mood on Local Economic Recessions.” Review of Financial Economics, 38 (2020), 245–274.CrossRefGoogle Scholar
Christiano, L. J.; Motto, R.; and Rostagno, M.. “Risk Shocks.” American Economic Review, 104 (2014), 27–65.CrossRefGoogle Scholar
Constantinides, G. M. “Habit Formation: A Resolution of the Equity Premium Puzzle.” Journal of Political Economy, 72 (1990), 519–543.CrossRefGoogle Scholar
Coval, J. D., and Moskowitz, T. J.. “Home Bias at Home: Local Equity Preference in Domestic Portfolios.” Journal of Finance, 54 (1999), 2045–2073.CrossRefGoogle Scholar
Coval, J. D., and Moskowitz, T. J.. “The Geography of Investment: Informed Trading and Asset Prices.” Journal of Political Economy, 109 (2001), 811–841.CrossRefGoogle Scholar
Crone, T. M. “An Alternative Definition of Economic Regions in the United States Based on Similarities in State Business Cycles.” Review of Economics and Statistics, 87 (2005), 617–626.CrossRefGoogle Scholar
Crone, T. M., and Clayton-Matthews, A.. “Consistent Economic Indexes for the 50 States.” Review of Economics and Statistics, 87 (2005), 593–603.CrossRefGoogle Scholar
Dao, M.; Furceri, D.; and Loungani, P.. “Regional Labor Market Adjustment in the United States: Trend and Cycle.” Review of Economics and Statistics, 99 (2017), 243–257.CrossRefGoogle Scholar
Di Maggio, M.; Kermani, A.; Ramcharan, R.; and Yu, E. G.. “Household Credit and Local Economic Uncertainty.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2991227 (2017).CrossRefGoogle Scholar
Dix-Carneiro, R., and Kovak, B. K.. “Trade Liberalization and the Skill Premium: A Local Labor Markets Approach.” American Economic Review, 105 (2015), 551–557.CrossRefGoogle Scholar
Francis, B. B.; Hasan, I.; John, K.; and Waisman, M.. “The Effect of State Antitakeover Laws on the Firm’s Bondholders.” Journal of Financial Economics, 96 (2010), 127–154.CrossRefGoogle Scholar
García, D., and Norli, Ø.. “Geographic Dispersion and Stock Returns.” Journal of Financial Economics, 106 (2012), 547–565.CrossRefGoogle Scholar
Gargano, A., and Rossi, A. G.. “Does It Pay to Pay Attention?” Review of Financial Studies, 31 (2018), 4595–4649.CrossRefGoogle Scholar
Gentzkow, M., and Shapiro, J. M.. “What Drives Media Slant? Evidence from U.S. Daily Newspapers.” Econometrica, 78 (2010), 35–71.Google Scholar
Gilchrist, S.; Sim, J. W.; and Zakrajšek, E.. “Uncertainty, Financial Frictions, and Investment Dynamics.” NBER Working Paper No. 20038 (2014).CrossRefGoogle Scholar
Giroud, X., and Rauh, J.. “State Taxation and the Reallocation of Business Activity: Evidence from Establishment-Level Data.” Journal of Political Economy, 127 (2019), 1262–1316.CrossRefGoogle Scholar
Grinblatt, M., and Keloharju, M.. “How Distance, Language, and Culture Influence Stockholdings and Trades.” Journal of Finance, 56 (2001), 1053–1073.CrossRefGoogle Scholar
Gulen, H., and Ion, M.. “Policy Uncertainty and Corporate Investment.” Review of Financial Studies, 29 (2015), 523–564.Google Scholar
Gutiérrez, G., and Philippon, T.. “Investment-Less Growth: An Empirical Investigation.” NBER Working Paper No. 22897 (2016).CrossRefGoogle Scholar
Gyourko, J., and Tracy, J.. “The Importance of Local Fiscal Conditions in Analyzing Local Labor Markets.” Journal of Political Economy, 97 (1989), 1208–1231.CrossRefGoogle Scholar
Hamilton, J. D., and Owyang, M. T.. “The Propagation of Regional Recessions.” Review of Economics and Statistics, 94 (2012), 935–947.CrossRefGoogle Scholar
Harvey, C. R., and Liu, Y.. “Lucky Factors.” Journal of Financial Economics, 141 (2021), 413–435.CrossRefGoogle Scholar
Hasler, M., and Martineau, C.. “Explaining the Failure of the Unconditional CAPM with the Conditional CAPM.” Management Science, 69 (2023), 1835–1855.CrossRefGoogle Scholar
Henriet, F.; Hallegatte, S.; and Tabourier, L.. “Firm-Network Characteristics and Economic Robustness to Natural Disasters.” Journal of Economic Dynamics and Control, 36 (2012), 150–167.CrossRefGoogle Scholar
Hoberg, G., and Phillips, G.. “Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis.” Review of Financial Studies, 23 (2010), 3773–3881.CrossRefGoogle Scholar
Hong, H.; Kubik, J. D.; and Stein, J. C.. “The Only Game in Town: Stock-Price Consequences of Local Bias.” Journal of Financial Economics, 90 (2008), 20–37.CrossRefGoogle Scholar
Huberman, G. “Familiarity Breeds Investment.” Review of Financial Studies, 14 (2001), 659–680.CrossRefGoogle Scholar
Husted, L.; Rogers, J.; and Sun, B.. “Monetary Policy Uncertainty.” Journal of Monetary Economics, 115 (2020), 20–36.CrossRefGoogle Scholar
Jens, C. “Political Uncertainty and Investment: Causal Evidence from U.S. Gubernatorial Elections.” Journal of Financial Economics, 124 (2017), 563–579.CrossRefGoogle Scholar
John, K.; Knyazeva, A.; and Knyazeva, D.. “Does Geography Matter? Firm Location and Corporate Payout Policy.” Journal of Financial Economics, 101 (2011), 533–551.CrossRefGoogle Scholar
Julio, B., and Yook, Y.. “Political Uncertainty and Corporate Investment Cycles.” Journal of Finance, 67 (2012), 45–83.CrossRefGoogle Scholar
Jurado, K.; Ludvigson, S. C.; and Ng, S.. “Measuring Uncertainty.” American Economic Review, 105 (2015), 1177–1216.CrossRefGoogle Scholar
Kahn, M. E. “The Death Toll from Natural Disasters: The Role of Income, Geography, and Institutions.” Review of Economics and Statistics, 87 (2005), 271–284.CrossRefGoogle Scholar
Keida, S., and Rajgopal, S.. “Neighborhood Matters: The Impact of Location on Broad Based Stock Option Plans.” Journal of Financial Economics, 92 (2009), 109–127.CrossRefGoogle Scholar
Kellenberg, D. K., and Mobarak, A. M.. “Does Rising Income Increase or Decrease Damage Risk from Natural Disasters?” Journal of Urban Economics, 63 (2008), 788–802.CrossRefGoogle Scholar
Kim, C.; Pantzalis, C.; and Park, J. C.. “Political Geography and Stock Returns: The Value and Risk Implications of Proximity to Political Power.” Journal of Financial Economics, 106 (2012), 196–228.CrossRefGoogle Scholar
Kimball, M. “Precautionary Saving in the Small and in the Large.” Econometrica, 58 (1990), 53–73.CrossRefGoogle Scholar
Leduc, S., and Liu, Z.. “Uncertainty Shocks Are Aggregate Demand Shocks.” Journal of Monetary Economics, 82 (2016), 20–35.CrossRefGoogle Scholar
Leland, H. E. “Saving and Uncertainty: The Precautionary Demand for Saving.” Quarterly Journal of Economics, 82 (1968), 465–473.CrossRefGoogle Scholar
Ludvigson, S. C.; Ma, S.; and Ng, S.. “COVID-19 and the Macroeconomic Effects of Costly Disasters.” AEA Papers and Proceedings, 111 (2021a), 366–370.CrossRefGoogle Scholar
Ludvigson, S. C.; Ma, S.; and Ng, S.. “Uncertainty and Business Cycles: Exogenous Impulse or Endogenous Response?” American Economic Journal: Macroeconomics, 13 (2021b), 369–410.Google Scholar
Manning, A., and Petrongolo, B.. “How Local Are Labor Markets? Evidence from a Spatial Job Search Model.” American Economic Review, 107 (2017), 2877–2907.CrossRefGoogle Scholar
Martin, I. W., and Wagner, C.. “What is the Expected Return on a Stock?” Journal of Finance, 74 (2019), 1887–1929.CrossRefGoogle Scholar
Masiero, G., and Santarossa, M.. “Natural Disasters and Electoral Outcomes.” European Journal of Political Economy, 67 (2021), 101983.CrossRefGoogle Scholar
Massa, M., and Simonov, A.. “Hedging, Familiarity and Portfolio Choice.” Review of Financial Studies, 19 (2006), 633–685.CrossRefGoogle Scholar
Mumtaz, H. “Does Uncertainty Affect Real Activity? Evidence from State-Level Data.” Economics Letters, 167 (2018), 127–130.CrossRefGoogle Scholar
Mumtaz, H.; Sundeer-Plassmann, L.; and Theophilopoulou, A.. “The State-Level Impact of Uncertainty Shocks.” Journal of Money, Credit and Banking, 50 (2018), 1879–1899.CrossRefGoogle Scholar
Owyang, M. T.; Piger, J.; and Wall, H. J.. “Business Cycle Phases in U.S. States.” Review of Economics and Statistics, 87 (2005), 604–616.CrossRefGoogle Scholar
Parsons, C. A.; Sabbatucci, R.; and Titman, S.. “Geographic Lead-Lag Effects.” Review of Financial Studies, 33 (2020), 4721–4770.CrossRefGoogle Scholar
Pástor, L., and Veronesi, P.. “Uncertainty About Government Policy and Stock Prices.” Journal of Finance, 67 (2012), 1219–1264.CrossRefGoogle Scholar
Pástor, L., and Veronesi, P.. “Political Uncertainty and Risk Premia.” Journal of Financial Economics, 110 (2013), 520–545.CrossRefGoogle Scholar
Peltzman, S. “Economic Conditions and Gubernatorial Elections.” American Economic Review, 77 (1987), 293–297.Google Scholar
Pence, K. M. “Foreclosing on Opportunity: State Laws and Mortgage Credit.” Review of Economics and Statistics, 88 (2006), 177–182.CrossRefGoogle Scholar
Peters, R. H., and Taylor, L. A.. “Intangible Capital and the Investment-q Relation.” Journal of Financial Economics, 123 (2017), 251–272.CrossRefGoogle Scholar
Pirinsky, C., and Wang, Q.. “Does Corporate Headquarters Location Matter for Stock Returns?” Journal of Finance, 61 (2006), 1991–2015.CrossRefGoogle Scholar
Pukthuanthong, K.; Roll, R.; and Subrahmanyam, A.. “A Protocol for Factor Identification.” Review of Financial Studies, 32 (2019), 1573–1607.CrossRefGoogle Scholar
Rodriguez, J. M., and Martinez, C.. “Natural Disasters, Electoral Performance, and Social Policy: Evidence from Mexico.” Working Paper, Princeton University (2021).Google Scholar
Rogers, J. H., and Xu, J.. “How Well Does Economic Uncertainty Forecast Economic Activity?” Working Paper, FEDS (2019).CrossRefGoogle Scholar
Romer, C. D., and Romer, D. H.. “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks.” American Economic Review, 100 (2010), 763–801.CrossRefGoogle Scholar
Seasholes, M. S., and Zhu, N.. “Individual Investors and Local Bias.” Journal of Finance, 65 (2010), 1987–2010.CrossRefGoogle Scholar
Shoag, D., and Veuger, S.. “Uncertainty and the Geography of the Great Recession.” Journal of Monetary Economics, 84 (2016), 84–93.CrossRefGoogle Scholar
Smajlbegovic, E. “Regional Economic Activity and Stock Returns.” Journal of Financial and Quantitative Analysis, 54 (2019), 1051–1082.CrossRefGoogle Scholar
Topel, R. H. “Local Labor Markets.” Journal of Political Economy, 94 (1986), 111–143.CrossRefGoogle Scholar
Wald, J. K., and Long, M. S.. “The Effect of State Laws on Capital Structure.” Journal of Financial Economics, 83 (2007), 297–319.CrossRefGoogle Scholar
Supplementary material: PDF

Elkamhi et al. supplementary material

Internet Appendix

Download Elkamhi et al. supplementary material(PDF)
PDF 1.8 MB