Economic policy uncertainty and the Chinese stock market volatility: new evidence |
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Authors: | Yu Li Yaojie Zhang Zuoping Xiao |
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Affiliation: | 1. School of Economics &2. Management, Southwest Jiaotong University, Chengdu, China;3. School of Economics and Management, Nanjing University of Science and Technology, Nanjing, China https://orcid.org/0000-0002-4220-1623;4. School of Accountancy, Hangzhou Dianzi University, Hangzhou, China |
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Abstract: | This study investigates the impacts of the economic policy uncertainty (EPU) indexes of China and the G7 countries on Chinese stock market volatility and further constructs a new diffusion index based on these indexes using principal component analysis (PCA) to achieve enhanced predictive ability. The in-sample results indicate that the EPU indexes of China and some of the G7 countries show a significantly negative impact on future volatility. Moreover, our constructed diffusion index also has a significantly negative impact. Furthermore, the out-of-sample results show that this diffusion index exhibits a significantly higher forecast accuracy than the EPU itself and combination forecasts. Finally, various robustness checks are consistent with our main conclusions. Overall, we construct a new and useful indicator that can substantially increase forecast accuracy with respect to the Chinese stock market. |
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Keywords: | Volatility forecasting the Chinese stock market G7 monthly realized volatility economic policy uncertainty diffusion index |
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