Economic policy uncertainty and the Chinese stock market volatility: new evidence

Yu Li, Feng Ma, Yaojie Zhang and Zuoping Xiao

Applied Economics, 2019, vol. 51, issue 49, 5398-5410

Abstract: This study investigates the impacts of the economic policy uncertainty (EPU) indexes of China and the G7 countries on Chinese stock market volatility and further constructs a new diffusion index based on these indexes using principal component analysis (PCA) to achieve enhanced predictive ability. The in-sample results indicate that the EPU indexes of China and some of the G7 countries show a significantly negative impact on future volatility. Moreover, our constructed diffusion index also has a significantly negative impact. Furthermore, the out-of-sample results show that this diffusion index exhibits a significantly higher forecast accuracy than the EPU itself and combination forecasts. Finally, various robustness checks are consistent with our main conclusions. Overall, we construct a new and useful indicator that can substantially increase forecast accuracy with respect to the Chinese stock market.

Date: 2019
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Citations: View citations in EconPapers (49)

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DOI: 10.1080/00036846.2019.1613507

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