The aim of this study is to assess the asymmetric connectedness between EPU of selected countries and Indian equity market. Economic, financial and political crises create significant economic uncertainty, affecting financial markets. Therefore, it is critical to conduct a thorough examination of the repercussions of Economic Policy Uncertainty (EPU) shocks on equity markets, considering the recent crisis.
The authors have applied an asymmetric time-varying parameter vector autoregression (TVP-VAR) model to assess asymmetric shock propagation between selected EPUs and the Indian equity market by decomposing returns into positive and negative components from January 2007 to July 2024.
This research finds that spillover effects are time-variant, event-dependent and stronger for negative returns. Domestic EPU has a higher influence on the Indian market than foreign EPU. India is insulated from China’s and Hong Kong’s economic policies. The repercussions of Japanese EPU on India’s economy are significant during both downside and upside markets. News from the USA significantly influences the downside risk of the Indian equity market. The systemic crises (Global Financial Crisis and Coronavirus) propagate significant uncertainty to the Indian market, unlike regional geopolitical events (Israel–Palestine feud) that have negligible direct financial connections with India.
This research underscores the growing salience of US and Japanese economic policy uncertainties in the Indian economic system. Since India is becoming a favorite spot for investment, this research will help foreign and domestic investors willing to invest in Indian equity markets.
To the best of the authors’ knowledge, this study is the first to use the asymmetric TVP-VAR method to assess the intensity and direction of the spillover effects of national and international EPUs on the Indian equity market during various crises, including recent Russo−Ukrainian and Israel−Palestine feud, previously unstudied.
