Does effect of risk and uncertainties on US sectoral returns differ across different investment horizons and market conditions

Abstract

Our work investigates the effect of different financial, economic and political uncertainties on US sectoral returns spanning over the period January 2000 to February 2022. We sample geopolitical risk, political uncertainty, geopolitical uncertainty, financial uncertainty, monetary policy uncertainty, and US economic policy uncertainty to measure their impact on basic materials, consumer goods, consumer services, financial, healthcare, industrials, oil and gas, telecom, technologies, and utilities sector. We decompose raw returns and risk and uncertainty series into short-, and long-run components using wavelet transformation to measure the effect on sectoral returns under short- and long-run investment horizons. Later, we employ quantile regression to quantify the effect of different risk and uncertainty measures on US sectoral returns under different market conditions. Our results highlight significant impact of risk and uncertainties on US sectoral returns across all quantile distributions in the long-run. We also report non-linear causality from risk and uncertainties toward US sectoral returns in the long-run.