| Summary: | This article examines the effects of economic policy uncertainty (EPU) on the implied volatility index. The implied volatility index of various markets has been analyzed in relation to scheduled macroeconomic announcements, such as EPU and equity market policy uncertainty (EMPU) indices. The study highlights that EPU contains important information to explain the diverse market effects of the U.S., which is gauged into the volatility index. Estimates obtained in an autoregressive conditional heteroscedasticity framework indicate the persistence of volatility during spikes in the EPU. More importantly, the lagged values of the policy uncertainty index also contains market-related information to explain the markets’ future volatility. Major political and economic events have also contributed positively in that a presidential election contains information to explain various asset classes. Commodities, such as crude oil, gold, corn, and soybean, have been impacted significantly followed by EPU. Moreover, interest rate market volatility has also been moved adversely due to tight monetary policy. The Markov regime switching regression manifests that the implied volatility index (VIX) behaves abruptly in two different regimes followed by EPU.
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