Economic Policy Uncertainty in China and Stock Market Expected Returns

22 Pages Posted: 27 Mar 2018

See all articles by Jian Chen

Jian Chen

Xiamen University - School of Economics

Fuwei Jiang

Central University of Finance and Economics (CUFE)

Guoshi Tong

Renmin University

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Date Written: December 2017

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 of EPU, 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 behavioural asset pricing models, in which high uncertainty amplifies behavioural biases and generates speculative mis‐pricing under short‐sales constraint.

Keywords: Return predictability, Economic policy uncertainty, Out‐of‐sample forecasting, Asset allocation, Chinese stock market

Suggested Citation

Chen, Jian and Jiang, Fuwei and Tong, Guoshi, Economic Policy Uncertainty in China and Stock Market Expected Returns (December 2017). Accounting & Finance, Vol. 57, Issue 5, pp. 1265-1286, 2017. Available at SSRN: https://ssrn.com/abstract=3150044 or http://dx.doi.org/10.1111/acfi.12338

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) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Guoshi Tong

Renmin University ( email )

59 Zhongguancun Street
Beijing, 100872
China

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