Economic policy uncertainty and stock market returns: New evidence

Yongan Xu, Jianqiong Wang, Zhonglu Chen and Chao Liang

The North American Journal of Economics and Finance, 2021, vol. 58, issue C

Abstract: 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.

Keywords: EPU; Stock return; Forecasting; Chinese stock market; Economic value (search for similar items in EconPapers)
JEL-codes: C58 F37 G17 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (27)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:58:y:2021:i:c:s1062940821001418

DOI: 10.1016/j.najef.2021.101525

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