Measuring Economic Uncertainty in China
Emerging Markets Finance and Trade, forthcoming
61 Pages Posted: 29 Aug 2019 Last revised: 6 Jan 2021
Date Written: August 24, 2019
This study develops a new economic uncertainty (EU) index based on Chinese newspapers to address the media coverage bias of existing measures. We investigate how EU affects China’s macroeconomy. Our results suggest that EU reduces aggregate output. We find that uncertainty predicts fluctuations in economic activity and actual economic activity also predicts EU, but nonlinearly. Furthermore, we show that uncertainty in the United States leads to uncertainty in China, implying that negative EU on the Chinese economy is coming from the U.S. Finally, we conduct some asset pricing tests, showing that EU can predict stock returns and commands risk premium. Our results are helpful for both researchers and policymakers to stabilize the economy and financial markets in China.
Keywords: economic uncertainty, China, newspaper, Granger causality, nonlinear causality
JEL Classification: C22, D80, E32, E66
Suggested Citation: Suggested Citation