The nexus of monetary, regulatory and national security policy uncertainties with S&P500: lessons of stock market crashes

Purpose This paper aims to investigate the causal effects that the cutting-edge US monetary, regulatory, financial regulatory and national security policy uncertainty indices exert on the highly representative S&P500 stock index from January 1985 to August 2022 during crises versus noncrisis periods. Design/methodology/approach Vector autoregressive methodologies are adopted to trace causality and reverse causality between alternative major sources of uncertainty in the USA and the major US stock index. Findings Intriguingly, it is revealed that shocks in monetary, regulatory, financial regulatory and national security uncertainties generate negative impacts on the S&P500 in the first two months in crash periods, whereas only the monetary and national security innovations lower this stock index in normal times. Notably, in terms of reverse causality, the S&P500 is found to be influential by lowering all types of uncertainties in normal times while temporarily decreases financial regulation uncertainty in bear markets. Notably, financial regulation is found to exhibit the tightest linkages with the S&P500 index as uncertainty in financial regulation increases competition by new forms of investments (such as cryptocurrencies) and renders the stock market less stable. Originality/value This study casts light on the influential factors that generate effects on stock markets during crises among a range of potential uncertainty sources. Moreover, the impact of stock markets on the risk stemming from monetary, regulatory, financial regulatory and national security issues is examined. Providing insights into the interconnectedness of a spectrum of US uncertainties with the US financial markets permits to provide a clearer picture of the interlinkages among difficultly-traced determinants of instability in the financial system and the main representative of this system in the advanced US economy and how these are affected by bear tendencies. This provides a roadmap for better action taking by policymakers and investors during crises through the lens of comparison with normal times.