Journal
ACCOUNTING AND FINANCE
Volume 57, Issue 5, Pages 1265-1286Publisher
WILEY
DOI: 10.1111/acfi.12338
Keywords
Return predictability; Economic policy uncertainty; Out-of-sample forecasting; Asset allocation; Chinese stock market
Categories
Funding
- National Natural Science Foundation of China [71602198, 71773152]
- Beijing Natural Science Foundation [9174045]
- Fundamental Research Funds for the Central Universities [20720151027]
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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.
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