Swedish Banks’ Exposure to Economic Policy Uncertainty: a GARCH Approach

Sammanfattning

This study investigates how EPU affects stock returns and volatility for Sweden’s four largest banks: Swedbank, Skandinaviska Enskilda Banken, Svenska Handelsbanken, and Nordea. As a small open economy with a concentrated and globally exposed banking sector, Sweden is particularly vulnerable to both domestic and international uncertainty shocks. Using monthly data from 2000 to 2024, we apply a GARCH (1,1) model with exogenous variables to assess the effects of Swedish and global EPU indices on bank-specific return dynamics. The study contributes to the literature by focusing on bank-level effects in a small economy and by distinguishing between domestic and global sources of policy uncertainty. We find that global EPU significantly reduces stock returns, especially for internationally oriented banks, while Swedish EPU more strongly influences conditional volatility, particularly among domestically focused institutions. These results highlight the importance of accounting for differentiated policy exposure when assessing financial sector risks.