The Impact of China Economic Policy Uncertainty on CSI 300: An Analysis of the Mediating Effect of Investor Sentiment

Abstract

This paper explores the mediating effect of investor sentiment on the relationship between China's economic policy uncertainty and the CSI 300 stock market returns. The study employs Principal Component Analysis (PCA) to construct the investor sentiment index, integrating six proxy variables. Additionally, the bootstrap analysis method is utilized to examine whether investor sentiment acts as an intermediary in determining the impact of economic policy uncertainty on stock market performance. The findings reveal that a significant portion (87.0%) of the total effect of economic policy uncertainty on stock returns is mediated through investor sentiment. The study underscores the pivotal role of investor sentiment in financial market behavior and emphasizes the need for policymakers to consider its influence during economic adjustments. Furthermore, it provides crucial recommendations for individual investors, promoting informed and rational decision-making in the dynamic financial landscape.