The time-varying correlation between policy uncertainty and stock returns: Evidence from China

Xiong Xiong, Yuxiang Bian and Dehua Shen

Physica A: Statistical Mechanics and its Applications, 2018, vol. 499, issue C, 413-419

Abstract: In this paper, we use a new policy uncertainty index to investigate the time-varying correlation between economic policy uncertainty (EPU) and Chinese stock market returns. The correlation is examined in the period from January 1995 to December 2016. We show that absolute changes in EPU have a significant impact on stock market returns. Specifically, empirical results based on the DCC-GARCH model reveal that the correlation between EPU and stock returns has large fluctuations, especially during a financial crisis; in addition, the impact of EPU on the Shanghai stock market is greater than on the Shenzhen stock market. Robustness results reveal that the impact of EPU on state-owned enterprises is larger than on non-state enterprises. All of these results highlight the important role of EPU in the Chinese stock market, and shed light on such issues for future research.

Keywords: Correlation analysis; Economic policy uncertainty; DCC-GARCH; Chinese stock market (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (38)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:499:y:2018:i:c:p:413-419

DOI: 10.1016/j.physa.2018.02.034

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