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Economic policy uncertainty in China and stock market expected returns
Author(s) -
Chen Jian,
Jiang Fuwei,
Tong Guoshi
Publication year - 2017
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12338
Subject(s) - economics , stock market , china , financial economics , stock (firearms) , capital asset pricing model , constraint (computer aided design) , econometrics , sample (material) , monetary economics , mechanical engineering , paleontology , chemistry , horse , chromatography , political science , law , biology , engineering
We investigate the impact of China's economic policy uncertainty ( EPU ) on the time series variation of Chinese stock market expected returns. Using the news‐based measure of EPU , we find that EPU predicts negatively future stock market return at various horizons. This negative relation between economic policy uncertainty and expected future return remains significant as we control for a number of economic and market uncertainty variables or conduct out‐of‐sample tests. Our findings are consistent with behavioural asset pricing models, in which high uncertainty amplifies behavioural biases and generates speculative mis‐pricing under short‐sales constraint.