Back
 JFRM  Vol.9 No.4 , December 2020
Research on the Relationship between China’s Economic Policy Uncertainty and Stock Market
Abstract: Under the cycle of increasing global uncertainty, China’s stock market is facing unprecedented challenges. This article explains the interaction mechanism between China’s economic policy uncertainty (EPU) and stock market prices, and uses monthly data from January 2005 to October 2020 to conduct empirical research, and finally conducts a robustness test. The results show that there is a long-term co-integration relationship between China’s EPU and China’s stock market prices, and they are Granger causality. On the basis of the above inspection, through impulse response analysis and variance decomposition methods, it is found that the impact of China’s stock market prices on the EPU has directional changes over time, and the impact of China’s stock market price rise will cause China’s EPU decline, the period of decline lasted for 4 months, after which the EPU gradually increased. Conversely, the increase of China’s EPU will have a significant inhibitory effect on China’s stock market prices, and it will have a lagging and long-term persistence. On the whole, China’s EPU has a very severe impact on China’s stock market. It is recommended to pay attention to the transmission of economic policy formulations to the stock market’s sentiment to reduce the impact of economic policies on the stability of the stock market.
Cite this paper: Zhou, D. and Jiang, Y. (2020) Research on the Relationship between China’s Economic Policy Uncertainty and Stock Market. Journal of Financial Risk Management, 9, 462-479. doi: 10.4236/jfrm.2020.94025.
References

[1]   Antonakakis, N., Chatziantoniou, I., & Filis, G. (2013). Dynamic Co-Movements of Stock Market Returns, Implied Volatility and Policy Uncertainty. Economics Letters, 120, 87-92.
https://doi.org/10.1016/j.econlet.2013.04.004

[2]   Bahmani-Oskooee, M., & Saha, S. (2019). On the Effects of Policy Uncertainty on Stock Prices. Journal of Economics and Finance, 43, 764-778.
https://doi.org/10.1007/s12197-019-09471-x

[3]   Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring Economic Policy Uncertainty. The Quarterly Journal of Economics, 131, 1593-1636.
https://doi.org/10.1093/qje/qjw024

[4]   Bernal, O., Gnabo, J. Y., & Guilmin, G. (2016). Economic Policy Uncertainty and Risk Spillovers in the Eurozone. Journal of International Money and Finance, 65, 24-45.
https://doi.org/10.1016/j.jimonfin.2016.02.017

[5]   Bloom, N. (2009). The Impact of Uncertainty Shocks. Econometrica, 77, 623-685.
https://doi.org/10.3982/ECTA6248

[6]   Chen, G. J., Zhang, R. Z., & Zhao, X. Q. (2017). Policy Uncertainty, Consumer Behavior and Stock Asset Pricing. World Economy, 40, 116-141.

[7]   Chiang, T. C. (2019). Economic Policy Uncertainty, Risk and Stock Returns: Evidence from G7 Stock Markets. Finance Research Letters, 29, 41-49.
https://doi.org/10.1016/j.frl.2019.03.018

[8]   Dzielinski, M. (2012). Which News Resolves Asymmetric Information? SSRN Electronic Journal, 1-36.
https://doi.org/10.2139/ssrn.2146698

[9]   Goodell, J. W., & Vähämaa, S. (2013). US Presidential Elections and Implied Volatility: The Role of Political Uncertainty. Journal of Banking &. Finance, 37, 1108-1117.
https://doi.org/10.1016/j.jbankfin.2012.12.001

[10]   Huang, Y., & Luk, P. (2019). Measuring Economic Policy Uncertainty in China. China Economic Review, 59, Article ID: 101367.
https://doi.org/10.1016/j.chieco.2019.101367

[11]   Jia, D., Sun, X., & Guo, R. (2019). Monetary Policy Announcements, Policy Uncertainties and the Pre-Announcement Premium Effect in the Stock Market—Evidence from the Chinese Market. Financial Research, 469, 76-95.

[12]   Koop, G., Pesaran, M. H., & Potter, S. M. (1996). Impulse Response Analysis in Nonlinear Multivariate Models. Journal of Econometrics, 74, 119-147.
https://doi.org/10.1016/0304-4076(95)01753-4

[13]   Li, X. L., Balcilar, M., Gupta, R., & Chang, T. (2016). The Causal Relationship between Economic Policy Uncertainty and Stock Returns in China and India: Evidence from a Bootstrap Rolling Window Approach. Emerging Markets Finance and Trade, 52, 674-689.
https://doi.org/10.1080/1540496X.2014.998564

[14]   Li, X. M., & Peng, L. (2017). US Economic Policy Uncertainty and Co-Movements between Chinese and US Stock Markets. Economic Modelling, 61, 27-39.
https://doi.org/10.1016/j.econmod.2016.11.019

[15]   Lin, J. H., Li, X., & Li, H. (2014). Empirical Study of Chinese Economic Policy Uncertainty and Asset Pricing. Chinese Management Science, No. 22, 222-226.

[16]   Pástor, L., & Veronesi, P. (2013). Political Uncertainty and Risk Premia. Journal of Financial Economics, 110, 520-545.
https://doi.org/10.1016/j.jfineco.2013.08.007

[17]   Sialm, C. (2005). Tax Changes and Asset Pricing: Time-Series Evidence. American Economic Review, 99, 1356-1383.
https://doi.org/10.1257/aer.99.4.1356

[18]   Sims, C. A. (1980). Macroeconomics and Reality. Econometrica, 48, 1-48.
https://doi.org/10.2307/1912017

[19]   Tsay, R. S. (2005). Analysis of Financial Time Series. Hoboken, NJ: John Wiley & Sons.
https://doi.org/10.1002/0471746193

[20]   Tsay, R. S. (2013). Multivariate Time Series Analysis: With R and Financial Applications. Hoboken, NJ: John Wiley & Sons.

[21]   Wang, H., Song, D. H., & Chen, L. H. (2018). The Uncertainty of Economic Policy and Stock Returns. Finance Quarterly, 12, 1-20.

[22]   Wu, T. P., Liu, S. B., & Hsueh, S. J. (2016). The Causal Relationship between Economic Policy Uncertainty and Stock Market: A Panel Data Analysis. International Economic Journal, 30, 109-122.
https://doi.org/10.1080/10168737.2015.1136668

 
 
Top