Chinese Economic Policy Uncertainty Research Articles

Does the Economic Policy Uncertainty in the USA and China Affect Indian Stock Markets Symmetrically and Asymmetrically? An Empirical Analysis of Pre- and Post-Coronavirus Disease 2019 Timelines

Globalization and economic interconnections have recently garnered a lot of attention, and scholars and policymakers are delving into the effects of policy uncertainty on macroeconomic fundamentals against this backdrop, the current study investigates the symmetric and asymmetric effects of economic policy uncertainty (EPU) in the USA and China on the Indian benchmark index. Furthermore, the study also analyses the variation in results due to the occurrence of uncertain events. For the empirical analysis, non-linear autoregressive distributed lag (NARDL) and autoregressive distributed lag (ARDL) techniques have been employed, and the findings substantiate an asymmetric relationship between the US EPU and the Indian stock market, while a symmetric relationship between the Chinese EPU and the Indian stock market. The study also reveals that in the short run, the Indian stock market is immune to the fluctuations in the Chinese stock market and policy uncertainty. Moreover, the outcomes further reveal that the US and Indian stock markets project a mirror performance. In addition, the study further reveals that, unlike the pre-Coronavirus Disease 2019 (COVID-19) timeline, during the COVID-19, the short-run volatility was high between the explanatory and outcome variables. The study is an original work and offers several useful recommendations.

The stress contagion among financial markets and its determinants

ABSTRACT The purpose of this paper is to study the spillover effects of financial stress among five important financial markets (bond, stock, foreign exchange, interbank, and real estate markets) in China, and explore the important determinants of financial stress spillover level among the markets and the impact of the Chinese stress spillover situation on the European markets. Our findings are as follows: First, there is a significant stress spillover effect among the five markets, and the total financial stress spillover index (TSSI) is very high during the global financial crisis. Generally, the stock and real estate markets are the major transmitters of stress spillover, and the interbank and bond markets are the major receivers. Second, the most macro factors have significant impacts on the financial stress spillover level among the markets, especially CPI index, the Chinese economic policy uncertainty index and VIX index. And the severity of the COVID-19 epidemic in China and the world has a significant impact on the TSSI, especially from March 2020 to August 2020. Finally, the TSSI can significantly increase the volatility of French stock market, Italian stock market and German government bond market, especially during the Sino-US trade war and the COVID-19 epidemic.

Economic policy uncertainty and stock market sector time-varying spillover effect: Evidence from China

This paper investigates the volatility spillover effect among the Chinese economic policy uncertainty index, stock markets, gold and oil by employing the time-varying parameter vector autoregressive (TVP-VAR) model. Three main results are obtained. Firstly, the optional consumption, industry, public utility and financial sectors are systemically important during the sample period. Secondly, among the four policy uncertainties, the uncertainty of fiscal policy and trade policy contributes more to the spillover effect, while the uncertainty of monetary policy and exchange rate policy contributes less to the spillover effect. Thirdly, during COVID-19, oil spillovers from other sources dropped rapidly to a very low point, it also had a significant impact on the net volatility spillover of the stock market. This paper can provide policy implication for decision-makers and reasonable risk aversion methods for investors.

Economic policy uncertainty of China and investment opportunities: a tale of ASEAN stock markets

PurposeThe purpose of this paper is to examine the effect of economic policy uncertainty (EPU) of China on investment opportunities in five ASEAN economies.Design/methodology/approachThis paper employs advanced empirical approaches, such as Multivariate DCC-GARCH and Continuous Wavelet Transform (CWT) to test the research objective. The period of analysis involved monthly data from 2003 until 2019.FindingsThis paper provides evidence where the Malaysian stock market to be the least exposed to risks emanating from Chinese EPU, followed by Singapore, the Philippines, Thailand and Indonesia. Results for investment opportunities based on time horizon suggest, for a short-term holding period, investors are better off investing in Singapore and Indonesia, while, for medium-term holding periods, all ASEAN markets appear lucrative except for the Philippines.Practical implicationsFrom a managerial perspective, the outcome or findings of this study are expected to aid the retail and institutional investors in designing better strategies on diversifying a stock portfolio with different holding periods.Originality/valueTheoretically, the findings of this study contribute fresh insights into an emerging strand of literature focusing on the transmission of regional policy. Methodologically as well, this study is a novel venture to the best of authors' knowledge.

Does economic policy uncertainty undermine stability of agricultural imports? Evidence from China.

China is the world’s largest importer of agricultural products. Stability of agricultural imports directly affects domestic food availability, and hence influences national food security. This study is important to gauge effects of uncertainty resulting from global and domestic economic policy changes on the stability component of food security in China. Though many studies have explored the determinants and consequences of Chinese agricultural trade, research focusing on stability of agricultural imports is lacking. To fill the gap, this study calculates duration length and survival probability of China’s agri-food imports, and estimates effects of economic policy uncertainty (EPU) on the stability. Results show that trade duration of the agri-food imports is 12.07 months in China. However, 51.69% of disrupted trade relationships would resume after 2 months and 92.68% of temporarily interrupted trade relationships return to the market after 12 months. Empirical estimations show that global EPU has a larger impact on the stability of agricultural imports than Chinese EPU. Although Chinese EPU has heterogeneous effects on imports of different agri-food products in China, global EPU does not. Stabilized domestic food price and improved domestic agricultural productivity would improve stability of the imports significantly. The study concludes that China’s agricultural imports are less dynamic than previous studies claimed. However, EPU significantly erodes the trade stability. To offset negative effects of EPU on the stability, government should pay more attention on stabilizing domestic food price volatility and increasing food productivity, and therefore improve food security in China.

Retracted] Analysis of Factors Influencing Stock Market Volatility Based on GARCH‐MIDAS Model

This paper further extends the existing GARCH‐MIDAS model to deal with the effect of microstructure noise in mixed frequency data. This paper has two highlights. First, according to the estimation of the long‐term volatility components of the GARCH‐MIDAS model, rAVGRV is adopted to substitute for the RV estimator. rAVGRV uses the rich data sources in tick‐by‐tick data and significantly corrects the impact of the microstructure noise on volatility estimation. Second, besides introducing macroeconomic variables (i.e., macroeconomic consistency index (MCI), deposits in financial institutions (DFI), industrial value‐added (IVA), and M2), Chinese Economic Policy Uncertainty (CEPU) index and Infectious Disease Equity Market Volatility Tracker (EMV) are introduced in the long‐run volatility component of the GARCH‐MIDAS model. As indicated by the results of this paper, the rAVGRV‐based GARCH‐MIDAS is slightly better than the RV model‐based GARCH‐MIDAS. In addition to the common macroeconomic variables significantly impacting stock market volatility, CEPU also substantially impacts stock market volatility. Nevertheless, the effect of EMV on the stock market is insignificant.

THE EFFECTS OF CHINESE POLICY UNCERTAINTY ON THE GLOBAL ECONOMIC OUTPUT AND TRADE MARKETS

This paper examines the international effects of Chinese policy uncertainty shock. Using the factor-augmented vector autoregression (FAVAR) model which can accommodate several economic variables from multiple countries, we model Chinese policy uncertainty jointly with three latent factors extracted from industrial production index, import value and export value. The results reveal that the change of one standard deviation of Chinese economic policy uncertainty (EPU) has a negative interference effect on global trade markets and industrial production, and so does the fiscal policy uncertainty (FPU). However, the impact of Chinese trade policy and monetary policy on three latent factors is not statistically significant. A country-level analysis shows that due to the heterogeneity of the economic structure and trade structure of each economy, countries have different responses to the uncertainty of Chinese economic policy. In particular, the extent to which imports and exports of each economy are affected is asymmetric.

Chinese Economic Policy Uncertainty and the Cross-Section of U.S. Asset Returns

We find that Chinese EPU shocks can explain 40% of the cross-sectional variation in bond returns. We also find that Chinese EPU shocks command a significant negative risk premia. In contrast to a strong explanatory power for bond markets, we do not find meaningful pricing power of Chinese EPU for equity markets. We argue and provide supporting empirical evidence that this result is attributable to the fact that Chinese EPU has a strong influence on the U.S. economy mainly during recessions. Overall, our findings suggest that a foreign EPU shock could be a potentially important factor in explaining bond returns.

Economic policy uncertainty and stock market returns: New evidence

This paper investigates the predictive performance of the Chinese economic policy uncertainty (EPU) index constructed by Davis, Liu, and Sheng (2019) in forecasting the returns of China’s stock market. Using the univariate and bivariate predictive regression model, we confirm that the monthly EPU index can significantly and negatively impact the next month’s stock returns, and has better out-of-sample predictability than the existing EPU index and several macroeconomic variables. By comparing the forecasting effect of the EPU index before and during special events with sharply increased uncertainty, we find that the EPU’s forecasting power decline rapidly when an event of sharply increased uncertainty occurs. Finally, our conclusions are consistent through a batch of robustness tests.

Economic policy uncertainty and corporate innovation: Evidence from China

This paper empirically examines the impact of the Chinese economic policy uncertainty (EPU) on corporate innovation. Using the EPU index that has been developed by Davis et al. (2019), and the data of Chinese A-share listed companies, we have found that the EPU is positively related to corporate technological innovation, and is negatively related to corporate business model innovation, in general. Furthermore, the rising market competition is also an important channel for firms to promote corporate innovation, particularly when they face a high EPU. The paper expands the understanding of corporate innovation, and also aims to enrich the empirical evidence that pertains to the impact of economic policy uncertainty, on corporate innovation.

Economic Policy Uncertainty in China and Bitcoin Returns: Evidence From the COVID-19 Period.

This paper analyses the effects of the Chinese Economic Policy Uncertainty (CEPU) index on the daily returns of Bitcoin for the period from December 31, 2019 to May 20, 2020. Utilizing the Ordinary Least Squares (OLS) and the Generalized Quantile Regression (GQR) estimation techniques, the paper illustrates that the current CEPU has a positive impact on the returns of Bitcoin. However, the positive impact is statistically significant only at the higher quantiles of the current CEPU. It is concluded that Bitcoin can be used in hedging against policy uncertainties in China since significant rises in uncertainty leads to a higher return in Bitcoin.JEL Codes: G32; G15; C22

The impact of economic policy uncertainty on stock volatility: Evidence from GARCH–MIDAS approach

The purpose of this paper is to investigate the impact of economic policy uncertainty on stock volatility forecast. We apply the GARCH–MIDAS model which can directly incorporate low-frequency economic policy uncertainty index and high-frequency stock return to model and forecast stock index volatility. The in-sample estimation results show that both level and variance of the change rate of Chinese economic policy uncertainty index provide useful information beyond realized volatility for stock index volatility forecast. The out-of-sample forecast results indicate that a combination of realized volatility and economic policy uncertainty in GARCH–MIDAS model can significantly improve the forecast performance of stock index volatility.

Chinese economic policy uncertainty and U.S. corporate investment

AbstractPrior findings suggest that firms reduce investment when they face a higher degree of domestic economic policy uncertainty. In this paper, we provide a new finding that corporate investment of U.S. firms also declines when Chinese economic policy uncertainty rises, after controlling for U.S. economic policy uncertainty. Additional analysis suggests that the result is stronger for firms located in states with larger exports to China, implying the importance of global supply chain link in understanding firms' investment decisions.

Chinese economic policy uncertainty and U.S. households' portfolio decisions

We find that U.S. households reduce their exposure to the stock market in response to an increase in the economic policy uncertainty (EPU) of not only U.S., but also to an increase in the Chinese EPU. We identify income uncertainty as a key driver of this relationship. In response to an increase in the Chinese EPU, households whose jobs belong to the industries that heavily exports to China react more sensitively by lowering their stock shares in financial wealth. Moreover, the response is stronger for households in states that export to China more than other states. These evidences suggest that U.S. households respond to the Chinese EPU because an increase in the Chinese EPU potentially increases their income uncertainty. Our findings provide the first evidence on the importance of considering foreign economic policy uncertainty in explaining households' portfolio decisions.

Forecasting Chinese EPU based on financial uncertainty in emerging market economies (EMEs): evidence from six selected East Asian economies

While the influential role of Economic Policy Uncertainty (EPU) on economic activity and financial markets is well-documented, little is known about how to forecast EPU, especially in the framework of an emerging market economy (EME). We forecast the newly developed EPU index of China based on financial uncertainty (measured by a realised volatility) of the selected East Asian Economies (EAEs) including ASEAN5 and Hong Kong, having close trade linkages with China, by using LR and DT methods. After controlling for macroeconomic variables, it is evident that the realised volatility of regional EAEs significantly forecasts the EPU of China, except for Thailand. Moreover, comparing the performance of both models based on the accuracy classification score test, LR performs better than DT. Policymakers, who aim to keep and maintain a low level of EPU to achieve effective investment policies and avoid reduced consumer spending, should take into account the findings of this study.

US Partisan Conflict and Cryptocurrency Market

This paper investigates whether partisan conflict can predict the cryptocurrency return and volatility. First, we find that the change rate of the partisan conflict can predict positively (negatively) the cryptocurrency return (volatility), Bitcoin in particular. Moreover, the findings still hold when controlling the effect of Chinese economic policy uncertainty (EPU), which is considered a significant predictor for the return and volatility of the Bitcoin. Overall, our results provide evidence to support that the Bitcoin could be a hedged asset against the risk from the U.S. partisan conflict.

Asymmetric volatility spillovers between economic policy uncertainty and stock markets: Evidence from China

This study explores the spillovers between economic policy uncertainty (EPU) and stock market realized volatility (RV). The monthly index of Chinese and US EPU and RV are used to analyze the pairwise directional spillovers. We find that RV is a net receiver that is more vulnerable to shocks from U.S. EPU than to shocks from Chinese EPU. We further decompose the RV into good and bad volatility to test the asymmetric spillover effect between the stock market and EPU. The results suggest that EPU has a bigger effect on bad volatility in the stock market throughout most of the sample period. However, we find that good volatility spillovers become larger during periods of stimulated reform, whereas bad volatility spillovers become larger during periods of international disputes. We show that Chinese stock market volatility is sensitive to both U.S. and Chinese EPU and that the spillover is asymmetric in different periods.

U.S., European, Chinese economic policy uncertainty and Moroccan stock market volatility

We investigate the impact of economic policy uncertainty in the U.S., France, Spain, Germany, the U.K., Italy and China on the long run volatility in the Moroccan stock market. For this reason, we combine both daily returns and monthly uncertainty data in the GARCH-MIDAS model. We decompose total volatility into a long run persistent component and short run cyclical component. This study will contribute to stock market research and international economic policy uncertainty (EPU).Our findings show that, before the global financial crisis (GFC) of 2008, the link between the Moroccan stock market and the EPU is generally insignificant for the long run volatility component, namely for France and Spain. However, this effect was relatively significant with the U.S. and German economic policy uncertainty. This result means that the total variance was more explained by the short run volatility component generated by daily stock market returns. Nevertheless, during the post-crisis period we compare our results with benchmark GARCH models by using the AIC criterion and variance ratios values. They display that almost all GARCH-MIDAS models with economic policy uncertainty perform significantly in explaining the long run volatility in the Moroccan stock market, particularly, the EPU of France, Spain and the US.Our paper findings could be very helpful for policy makers and portfolio managers. Understanding the long-term relationship between the Moroccan stock market volatility and international economic policy uncertainty can be crucial in terms of adopting efficient decisions. They can also improve the efficiency of asset allocation for investors.

Impact of Economic Policy Uncertainty on the Distribution of China’s Stock Returns: An External Perspective

This study examines the impact of external economic policy uncertainty on the distribution of China’s stock returns. The Chinese Economic Policy Uncertainty (CEPU) and global EPU (GEPU) indexes compiled by [1] are employed as a measurement of the external uncertainty. An empirical study is conducted using the GARCH-MIDAS framework. The first innovation of this study is extending the symmetric GARCH-MIDAS model to the case of GJR; the leverage effect is therefore considered. The second innovation is considering the impact of EPU on the overall distribution of returns, rather than on the mean or volatility. Full-sample fitting shows that CEPU can explain around 14% of the return volatility, and CEPU together with GEPU can explain about 17%. Out-of-sample recursive forecasting demonstrates that it is meaningful to extend the models to GJR; the EPU information improves the return distribution forecasting. However, the impact of EPUs is limited, which implies that external uncertainty is quite different from the “internal” economic policy uncertainty directly driving the China’s stock market.

Explaining Disparities in AH Stock Premium Returns with Chinese Economic Policy Uncertainty: Evidence Based on a Non-Parametric Analysis

This paper empirically investigates the AH share premium puzzle considering the impact of economic policy uncertainty (EPU) in China, using Hang Seng AH premium (HSAHP) index data from March 2011 to June 2018. Specifically, the index of Baker, Bloom, and Davis is used as a proxy for EPU in China. The data has been divided into two periods: 0 and 1. Period 0 includes data before the launch of the stock connect program and spans from March 2011 to October 2014, while period 1 represents data from after the launch of stock connect program and spans from November 2014 to June 2018. To more robustly test the change in AH premiums after the “connect” is launched; we evaluate the impact of Chinese EPU using non-parametric kernel density estimation. The empirical results show that parameter uncertainty explains variations in price disparity and can significantly reduce the returns of the AH share premium index.