Economic Policy Uncertainty in China and Stock Market Expected Returns

33 Pages Posted: 13 Jul 2016  

Jian Chen

Xiamen University - School of Economics

Fuwei Jiang

Central University of Finance and Economics (CUFE) - School of Finance

Guoshi Tong

Renmin University

Date Written: July 12, 2016

Abstract

We investigate the impact of China’s economic policy uncertainty (EPU) on the time series variation of Chinese stock market expected returns. Using the news based measure in Baker, Bloom, and Davis (2016), we find that EPU predicts negatively future stock market return at various horizons. This negative relation between economic policy uncertainty and expected future return remains significant as we control for a number of economic and market uncertainty variables or conduct out-of-sample tests. Our findings are consistent with asset pricing theories with belief dispersion, in which high uncertainty or investors disagreement generates speculative mispricing when pessimistic investors face short-sales constraints.

Keywords: Return Predictability, Economic Policy Uncertainty, Out-of-sample Forecasting, Asset Allocation, Chinese Stock Market

JEL Classification: C22, C53, G11, G12, G17

Suggested Citation

Chen, Jian and Jiang, Fuwei and Tong, Guoshi, Economic Policy Uncertainty in China and Stock Market Expected Returns (July 12, 2016). Available at SSRN: https://ssrn.com/abstract=2808862 or http://dx.doi.org/10.2139/ssrn.2808862

Jian Chen (Contact Author)

Xiamen University - School of Economics ( email )

422 Siming Nan Road
Xiamen, Fujian 361005
China

Fuwei Jiang

Central University of Finance and Economics (CUFE) - School of Finance ( email )

39 South College Road
Haidian District
Beijing, 100081
China

Guoshi Tong

Renmin University ( email )

59 Zhongguancun Street
Beijing, 100872
China

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