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Theoretical and Applied Economics
No. 1 / 2021 (626), Spring

Economic policy uncertainty and adaptability in international capital markets

Paulo Vitor Souza de SOUZA
Federal University of Pará, Brazil
César Augusto Tibúrcio SILVA
University of Brasília, Brazil

Abstract. This article has analyzed the association of economic-political uncertainty with efficiency in international capital markets. As the Adaptive Markets Hypothesis (HMA) points out, market efficiency may be affected by changes in market conditions. We understand that periods of economic-political uncertainty represent changes in the economic environment of countries. The capital market's efficiency level was obtained through Hurst's exponent, calculated based on the average performance indicators of stock markets belonging to 21 different economies. We got the political-economic uncertainty through an index representing the frequency of information regarding uncertainty made available in the countries' media from 2003 to 2018. After calculating Hurst's exponent in four-time windows, the regression method with panel data was used, with the cultural dimensions, inflation, and growth of the economy as control variables. The results point to a negative and significant relationship of economic-political uncertainty with market inefficiency. These findings denote periods of more significant economic-political uncertainty and tend to present less informational inefficiency. However, the global financial crisis results point to a positive and significant relationship between political uncertainty and market inefficiency. These results show that uncertainty increased the level of inefficiency, specifically in periods of recession. However, this picture has reversed over the years, which may represent that the economies have begun to adapt to these environments of uncertainty, thus corroborating capital markets' adaptability.

Keywords: market efficiency; adaptive market; political uncertainty; cultural dimensions.

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