Stock market uncertainty and economic fundamentals: an entropy-based approach |
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Authors: | K. Ahn D. Lee B. Yang |
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Affiliation: | 1. Graduate School of Future Strategy, KAIST, Daejeon, Republic of Korea;2. Human Development &3. Family Studies, Iowa State University, Ames, USA;4. Department of Finance, Bocconi University, Milano, Italy |
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Abstract: | This study investigates the effects of stock market uncertainty on economic fundamentals, represented by economic activities and systemic risk, in China. To capture the uncertainty in the Chinese stock market precisely, we use the entropy measure through symbolic time-series analysis. The empirical findings reveal strong spillover effects from stock market uncertainty to economic fundamentals. Specifically, an uncertainty shock generates (i) a short-term decline in industrial production, (ii) a rapid drop and rebound in the composite leading indicator, and (iii) an increase in systemic risk. To understand these findings, we suggest and validate the transmission channel through changes in consumption and investment. |
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Keywords: | Entropy Stock market uncertainty Economic activities Systemic risk |
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