Economic policy uncertainty and short‐term reversals

Abstract In this article, we provide new evidence on the impact of economic policy uncertainty (EPU) on asset pricing. Specifically, we find that short‐term return reversals are stronger following high‐EPU periods, likely due to an uncertainty‐induced decrease in stock market liquidity. However, EPU does not appear to have a significant effect on accounting‐based anomalies, possibly because these anomalies are not driven by stock illiquidity. Our findings suggest that EPU affects short‐term asset prices mainly through stock liquidity. However, EPU may contain incremental information beyond stock liquidity. Moreover, the arrival of the latest fundamental information could significantly mitigate the effect of EPU on short‐term reversals.