Does monetary policy uncertainty command a risk premium in the Chinese stock market?

Lei Lin, Jing Tan and Wenzhen Liu

International Review of Finance, 2022, vol. 22, issue 3, 433-452

Abstract: We examine the pricing implications of monetary policy uncertainty (MPU) in the cross‐section of stock returns in the Chinese stock market. Our results show that the long‐short portfolio that is long stocks with the lowest exposures to innovations in MPU and short stocks with the highest exposures to innovations in MPU earns about 6% annualized alpha. The coskewness, idiosyncratic volatility, size, and book‐to‐market effects cannot account for the low (high) average returns earned by stocks with high (low) exposures to innovations in MPU. Furthermore, the exposure to innovations in MPU commands a significantly negative risk premium in the Fama‐MacBeth regressions. These results indicate that investors have preferences for the early resolution of MPU.

Date: 2022
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