Economic policy uncertainty in China and stock market expected returns

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.