Economic Policy Uncertainty and Chinese Stock Market Volatility: A CARR‐MIDAS Approach

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Intraday range (the difference between intraday high and low prices) is often used to measure volatility, which has proven to be a more efficient volatility estimator than the return‐based one. Meanwhile, a growing body of studies has found that economic policy uncertainty (EPU) has important impact on stock market volatility. In this paper, building on the range‐based volatility model, namely, the conditional autoregressive range (CARR) model, we introduce the CARR‐mixed‐data sampling (CARR‐MIDAS) model framework by considering intraday information to investigate the impact of EPU on the volatility of Chinese stock market and to explore the predictive ability of EPU for Chinese stock market. The empirical results show that both the China EPU (CEPU) and global EPU (GEPU) have a significantly negative effect on the long‐run volatility of Chinese stock market. Furthermore, we find that taking into account the CEPU and GEPU leads to substantial improvement in the ability to forecast the volatility of Chinese stock market. We also find that the CEPU provides superior volatility forecasts compared to the GEPU. Our findings are robust to different forecasting windows.