Economic Policy Uncertainty and the stock market anomalies: Evidence from Australia

This paper studies the impact of US and China Economic Policy Uncertainty (EPU) on stock market anomalies related to firm size, value, profitability, and investment in the Australian stock market. Given Australia's economic ties to these major economies, we use EPU indices from Baker et al. (2016) for the US and Huang and Luk (2020) for China. Employing quantile regression techniques, we find that EPU from both countries has a significant influence on daily anomaly returns, amplifying (suppressing) them in bull (bear) markets. However, portfolio regression analysis reveals that only CHEPU effectively predicts monthly returns anomalies for firm size, value, and investment. The mediation analysis shows that the market excess returns proxying for market risk premium mediates 11 %–34 % of the CHEPU effect, with an average mediated effect of 21 %. By focusing on Australia's exposure to US and Chinese economic policies, this study provides new insights into how the EPU affects stock market anomalies, thereby enhancing our understanding of the factors that drive asset pricing globally.