The Moderating Effect of Bureaucratic Quality on the Pricing of Policy Instability

China Finance Review International, 2015, Vol 5 (3), 303-334.

51 Pages Posted: 17 Nov 2011 Last revised: 4 Jan 2017

See all articles by Swee Sum Lam

Swee Sum Lam

National University of Singapore - NUS Business School

Weina Zhang

Department of Finance, National University of Singapore; National University of Singapore Risk Management Institute

Date Written: April 30, 2015

Abstract

We examine how policy instability is priced in interest rates. Policy instability refers to the likelihood that the current policy will be changed in the future in the absence of political power shifts. Chinese government’s experimental policymaking approach provides an ideal set of frequent policy flip-flops which allows us to identify the effect of policy changes. Conditional on the bureaucratic quality of policymaking, a good-quality policy reversal is related to reductions in interest rate term spread and volatility; a bad-quality policy reversal is related to increases in the spread and volatility. The bureaucratic quality is multi-dimensional and the moderating effect is stronger on interest rates when it is measured more precisely.

Keywords: policy instability, policy reversal, policy risk, bureaucratic quality, liberalization,interest rate, interest rate spread, interest rate volatility

JEL Classification: E4, G1, G12, G18

Suggested Citation

Lam, Swee Sum and Zhang, Weina, The Moderating Effect of Bureaucratic Quality on the Pricing of Policy Instability (April 30, 2015). China Finance Review International, 2015, Vol 5 (3), 303-334.. Available at SSRN: https://ssrn.com/abstract=1960292 or http://dx.doi.org/10.2139/ssrn.1960292

Swee Sum Lam

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore
+65 6516 3037 (Phone)
+65 6779 2083 (Fax)

HOME PAGE: http://www.bschool.nus.edu

Weina Zhang (Contact Author)

Department of Finance, National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
65168120 (Phone)
67792083 (Fax)

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/108-weina

National University of Singapore Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

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