Policy uncertainty, investor sentiment, and good and bad volatilities in the stock market: Evidence from China

Jihong Xiao, Jiajie Jiang and Yaojie Zhang

Pacific-Basin Finance Journal, 2024, vol. 84, issue C

Abstract: This paper investigates the impact of fiscal policy uncertainty (FPU), monetary policy uncertainty (MPU), trade policy uncertainty (TPU), and exchange rate and capital account policy uncertainty (ECPU) on the good and bad volatilities in the Chinese stock market. Considering the pronounced irrational behavior within the Chinese stock market, we also assess the role of investor sentiment in the relationship between these policy uncertainty measures and stock market volatilities. The empirical results show that FPU contributes positively to both good and bad volatilities, MPU and ECPU positively affect bad volatility, whereas TPU has an insignificant effect on any volatilities. Further asymmetric and lagged effects analysis indicates that the impact of FPU, MPU, and ECPU has no asymmetries, with only FPU and MPU displaying lagged effects. Finally, we find that investor sentiment mainly mitigates the positive impact of ECPU on bad volatility.

Keywords: Policy uncertainty; Stock market; Good volatility; Bad volatility; Investor sentiment (search for similar items in EconPapers)
JEL-codes: C58 G18 G41 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:84:y:2024:i:c:s0927538x24000544

DOI: 10.1016/j.pacfin.2024.102303

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