Economic Policy Uncertainty, Investor Sentiment, and Stock Price Synchronisation: Evidence from China

Abstract

This paper explores the general decision mechanism of stock price synchronicity through in-depth research on the two main viewpoints of information efficiency view and irrational behaviour view. On this basis, we explore the effect of China’s economic policy uncertainty gradually on the synchronisation of stock prices and provide a reasonable explanation for it. Based on the China Economic Policy Uncertainty Index developed by Baker et al., this paper takes China’s A-share listed firms from 2010 to 2019 as the primary sample and tests the effect of China’s economic policy uncertainty on the synchronicity of stock prices by constructing a comprehensive mediation effect test procedure. The fundamental effect and its internal mechanism of action have been supplemented and verified from investor sentiment. Strengthening the research on economic policy uncertainty and stock price synchronisation may deeply explore the internal mechanism of the listed firms’ stock price changes, help in improving the information production function and information transmission function of the securities market, help in improving the resource allocation capacity of the entire capital market, and then promote the long-term healthy development of China’s capital market. The main findings of this paper are as follows: (1) in China’s stock market, which is driven by noise, the increase of economic policy uncertainty will significantly reduce the synchronisation of stock prices; (2) increased uncertainty about China’s economic policy will fuel the investor sentiment and reduce stock price synchronicity, with investor sentiment playing an intermediary role.