Domestic and Foreign Economic Policy Uncertainty : Evidence from the Swedish Stock Market

Sammanfattning

Background: Economic Policy Uncertainty (EPU) has become increasingly important in financial economics following periods of heightened global political and economic instability. Previous research largely documents a negative relationship between EPU and stock market performance, particularly in large economies such as the United States. However, limited empirical evidence exists regarding how domestic and foreign uncertainty affect stock markets within small open economies such as Sweden. Purpose: The purpose of this study is to examine whether Swedish and U.S. Economic Policy Uncertainty predict stock market performance in Sweden and the United States, respectively, and to investigate whether foreign uncertainty exerts stronger effects than domestic uncertainty within a small open economy context. Method: The study applies a quantitative time-series approach using monthly data from February 2013 to April 2025. Vector Autoregression (VAR) models and Granger causality tests are employed to analyse predictive relationships between EPU indices and excess stock market returns for OMXS30 and S&P500. Extended VAR specifications additionally include realised volatility and inflation controls to strengthen robustness. Conclusion: The findings show no statistically significant predictive relationship between Swedish EPU and OMXS30 excess returns. In contrast, U.S. EPU significantly predicts S&P500 excess returns and also demonstrates great potential to hold predictive power over 2 Swedish stock market returns. The results suggest that stock markets in small open economies are more strongly influenced by foreign uncertainty shocks than by domestic policy uncertainty, emphasizing the importance of international spillover effects in globally integrated financial markets.