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New evidence on economic policy uncertainty and equity premium

Xiao-Ming Li ()

Pacific-Basin Finance Journal, 2017, vol. 46, issue PA, 41-56

Abstract: Motivated by well-documented observations that the Chinese equity market is dominated by risk-seeking speculators with a behavioural bias, we test the hypothesis that China's economic policy uncertainty (EPU) commands a positive equity premium. We find stocks with higher EPU betas earn higher average returns, and the EPU factor-mimicking portfolio earns significant abnormal returns. Loadings on the EPU factor positively forecast the cross-section of returns on various sets of portfolios or stocks, controlling for macroeconomic and stock market uncertainty factors, conventional risk factors, and firm characteristics. Our findings are complimentary to the recently reported US evidence of a negative premium.

Keywords: Asset pricing, equity premium; Government policy uncertainty; Misvaluation; China (search for similar items in EconPapers)
JEL-codes: C10 G12 G18 N35 (search for similar items in EconPapers)
Date: 2017
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Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

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Handle: RePEc:eee:pacfin:v:46:y:2017:i:pa:p:41-56