Empirical investigation of changes in policy uncertainty on stock returns—Evidence from China’s market |
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Institution: | 1. Policy Research Department, Executive Office, Shanghai Stock Exchange, 528 Pudong South Road, Shanghai, PR China;2. Department of Finance, Drexel University, LeBow Hall, 3220 Market Street, Philadelphia, PA, 19104, USA |
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Abstract: | This study finds evidence that a rise in economic policy uncertainty (EPU) leads to a decline in stock returns in Chinese market; however, a positive coefficient was observed in the lagged EPU as stock prices rebound. This phenomenon also holds true for a rise in uncertainty innovations in fiscal policy, monetary policy, trade policy and global policy. The evidence leads to conclude that policy uncertainty premiums should be priced into China’s stock prices. An escalation of U.S. policy uncertainty has a significantly harmful effect on Chinese stocks regardless of whether firms are stated own or listed on U.S. market. |
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Keywords: | Economic policy uncertainty Downside risk GARCH model Risk-return relation Uncertainty premium Chinese stock market |
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