Research on the Impact of Economic Policy Uncertainty and Investor Sentiment on the Growth Enterprise Market Return in China—An Empirical Study Based on TVP-SV-VAR Model

Junxiao Gui (), Nathee Naktnasukanjn (), Xi Yu and Siva Shankar Ramasamy
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Junxiao Gui: International College of Digital Innovation, Chiang Mai University, Chiangmai 50100, Thailand
Nathee Naktnasukanjn: International College of Digital Innovation, Chiang Mai University, Chiangmai 50100, Thailand
Xi Yu: Overseas Education College, Chengdu University, Chengdu 610106, China
Siva Shankar Ramasamy: International College of Digital Innovation, Chiang Mai University, Chiangmai 50100, Thailand

IJFS, 2024, vol. 12, issue 4, 1-20

Abstract: This study employs the economic policy uncertainty index to gauge the level of economic policy uncertainty in China. Utilizing textual data from the growth enterprise market internet community, we construct the growth enterprise market investor sentiment index by applying the deep learning ERNIE (Enhanced Representation through Knowledge Integration) model, thereby capturing investors’ sentiment within the growth enterprise market. The dynamic interplay between economic policy uncertainty, investor sentiment, and returns of the growth enterprise market is scrutinized via the TVP-SV-VAR (time-varying parameter stochastic volatility vector auto-regression) model, and the asymmetric response of different industries’ stock returns within the growth enterprise market to economic policy uncertainty and investor sentiment shock. The findings of this research are that economic policy uncertainty exerts a negative influence on both investor sentiment and returns of the growth enterprise market. While it may trigger a temporary decline in stock prices, the empirical evidence suggests that the impact is of short duration. The influence of investor sentiment on the growth enterprise market returns is characterized by a reversal effect, suggesting that improved sentiment may initially boost stock prices but could lead to a subsequent decline over the long term. The relationship between economic policy uncertainty, investor sentiment, and returns of the growth enterprise market is time-variant, with heightened sensitivity observed during bull markets. Lastly, the effects of economic policy uncertainty and investor sentiment on the returns of different industries within the growth enterprise market are found to be asymmetric. These conclusions contribute to the existing body of literature on the Chinese capital market, offering a deeper understanding of the complex dynamics and the factors influencing market behavior.

Keywords: economic policy uncertainty; investor sentiment; growth enterprises market; TVP-SV-VAR model (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2024
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