The Effect of Economic Policy Uncertainty in the US on the Stock Market Performance in Canada and Mexico

Abstract

This paper investigates the effect of economic policy uncertainty in the United States on stock market performance in Canada and Mexico. Using monthly returns of the Canada S&P/TSX-300 Total Return Index from 1985:2 to 2012:5 and Mexico SE Total Return Index from 1988:1 to 2012:5, this study shows that the increased changes in economic policy uncertainty in the US negatively affect stock market performance in Canada and Mexico. Although the changes in the U.S. trade balance do not influence the effect of the changes in economic policy uncertainty in the US on the stock market performance in Canada and Mexico, the returns on the S&P 500 do have an impact on this effect. The findings suggest that stock market performance in Canada and Mexico is linked to the economic policy conditions and stock performance in the US. The implication of this finding is that market participants in Canada and Mexico do pay attention to the economic policy conditions and stock performance in the US.