Policy Uncertainty and Stock Market Returns: Nonlinear Analysis Based on MF-DCCA

Abstract

This paper studies the relationship between policy uncertainty and stock market returns by using multifractal detrended cross-correlation analysis (MF-DCCA) method. We choose China economic policy uncertainty index (CNEPU) and Shanghai stock market returns as the research object of this paper. Using detrended fluctuation analysis (MF-DFA) method to examine the multifractal properties of CNEPU change series and Shanghai stock market returns, we find that both returns and CNEPU change series have multifractal characteristics. And using multifractal detrended cross-correlation analysis (MF- DCCA) method, we find that there exists strong anti-persistent cross-correlation between Shanghai stock market returns and CNEPU change series. Besides, we find that the fat-tail distribution is the main reason for the multifractality in the cross-correlations.