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Causality between economic policy uncertainty and exchange rate in China with considering quantile differences

Author

Listed:
  • Yin DAI

    (Ocean University of China, Qingdao, Shandong, China)

  • Jing-wen ZHANG

    (College of Finance and Statistics, Hunan University, Changsha, China)

  • Xiu-zhen YU

    (Qingyang Municipal Sub-branch PBC, Qingyang, Gansu, China)

  • Xin LI

    (Antai College of Economics & Management, Shanghai Jiao Tong University, Shanghai, China)

Abstract

Under an existing theoretical framework regarding the relationship between investment decision and the size of economic policy uncertainty (EPU), this paper tests the causality between EPU and exchange rate (ER). Theoretically, the impact of EPU on ER should be treated asymmetrically since investors need higher risk premiums to offset the consequences of growing EPU. The causality is investigated by using the quantile Granger causality test. This test shows that causality is more significant in the tail quantile interval. Since EPU of China is extremely high since 2016, and ER also experienced huge fluctuations during this period, our result provides an empirical basis for international investors to protect themselves against the risks associated with EPU in the exchange market.

Suggested Citation

  • Yin DAI & Jing-wen ZHANG & Xiu-zhen YU & Xin LI, 2017. "Causality between economic policy uncertainty and exchange rate in China with considering quantile differences," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(3(612), A), pages 29-38, Autumn.
    • Handle: RePEc:agr:journl:v:3(612):y:2017:i:3(612):p:29-38
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    References listed on IDEAS

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    2. Khyati Kathuria & Nand Kumar, 2022. "Pandemic‐induced fear and government policy response as a measure of uncertainty in the foreign exchange market: Evidence from (a)symmetric wild bootstrap likelihood ratio test," Pacific Economic Review, Wiley Blackwell, vol. 27(4), pages 361-379, October.
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    7. Ngo Thai Hung, 2021. "Directional Spillover Effects Between BRICS Stock Markets and Economic Policy Uncertainty," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 28(3), pages 429-448, September.
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