Is U.S. Economic Policy Uncertainty Priced in China's A-Shares Market? Evidence from Market, Industry, and Individual Stocks

Abstract

Motivated by Bali et al. (2016) who find U.S. economic policy uncertainty (EPU) is priced in the cross-section of U.S. stock returns, we use weekly data from March 2006 to April 2016 to study whether shocks in U.S. EPU also influence prices of China's A-shares from market, industry, and individual stock perspectives. Generally, after controlling business conditions in China, we find the shock in U.S. EPU significantly and negatively explains returns of China's A-shares with a lag. In addition, the market index containing small and growth stocks react more significantly to the shock than the index containing big and value stocks. Furthermore, we find firms in manufacturing, information technology, and media industries in China are more sensitive to the shock in U.S. EPU, while firms in agriculture and real estate industries in China correspond less to the shock in U.S. EPU. Finally, China's A-shares which decline more in response to the shock in U.S. EPU have higher stock returns and those stocks have smaller size, weaker operating profitability, higher asset growth, and better past year's cumulative return. Overall, our findings show that investors of China's A-shares require a premium to hold stocks sensitive to the shock in U.S. EPU.