IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v39y2021ics1544612319314102.html
   My bibliography  Save this article

The impact of economic policy uncertainty on volatility of China’s financial stocks: An empirical analysis

Author

Listed:
  • Wang, Xinyu
  • Luo, Yi
  • Wang, Zhuqing
  • Xu, Yan
  • Wu, Congxin

Abstract

We modify the GARCH-MIDAS model by introducing a skewed T-distribution and employ it to study the impact of economic policy uncertainties on the volatility of China’s financial stocks between 2000–2019. The modified model improves the fit to the data compared to the standard model with a Gaussian distribution. We find that economic policy uncertainties worldwide and in the European Union, Japan, Russia, Brazil, Canada, and China are negatively correlated with the long-term component of volatility of China’s financial stocks. The heightened uncertainty in the US economic policy since 2017 has had a negative impact on the volatility of China’s financial stocks.

Suggested Citation

  • Wang, Xinyu & Luo, Yi & Wang, Zhuqing & Xu, Yan & Wu, Congxin, 2021. "The impact of economic policy uncertainty on volatility of China’s financial stocks: An empirical analysis," Finance Research Letters, Elsevier, vol. 39(C).
    • Handle: RePEc:eee:finlet:v:39:y:2021:i:c:s1544612319314102
    DOI: 10.1016/j.frl.2020.101650
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612319314102
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2020.101650?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Christou, Christina & Cunado, Juncal & Gupta, Rangan & Hassapis, Christis, 2017. "Economic policy uncertainty and stock market returns in PacificRim countries: Evidence based on a Bayesian panel VAR model," Journal of Multinational Financial Management, Elsevier, vol. 40(C), pages 92-102.
    2. Panayiotis Theodossiou, 1998. "Financial Data and the Skewed Generalized T Distribution," Management Science, INFORMS, vol. 44(12-Part-1), pages 1650-1661, December.
    3. Shawkat Hammoudeh & Won Joong Kim & Soodabeh Sarafrazi, 2016. "Sources of Fluctuations in Islamic, U.S., EU, and Asia Equity Markets: The Roles of Economic Uncertainty, Interest Rates, and Stock Indexes," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(5), pages 1195-1209, May.
    4. Chuliá, Helena & Gupta, Rangan & Uribe, Jorge M. & Wohar, Mark E., 2017. "Impact of US uncertainties on emerging and mature markets: Evidence from a quantile-vector autoregressive approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 178-191.
    5. Elena Andreou & Eric Ghysels, 2002. "Detecting multiple breaks in financial market volatility dynamics," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 17(5), pages 579-600.
    6. Aastveit, Knut Are & Natvik, Gisle James & Sola, Sergio, 2017. "Economic uncertainty and the influence of monetary policy," Journal of International Money and Finance, Elsevier, vol. 76(C), pages 50-67.
    7. Bekiros, Stelios & Gupta, Rangan & Kyei, Clement, 2016. "On economic uncertainty, stock market predictability and nonlinear spillover effects," The North American Journal of Economics and Finance, Elsevier, vol. 36(C), pages 184-191.
    8. Horváth, Lajos & Kokoszka, Piotr & Zhang, Aonan, 2006. "Monitoring Constancy Of Variance In Conditionally Heteroskedastic Time Series," Econometric Theory, Cambridge University Press, vol. 22(3), pages 373-402, June.
    9. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    10. Arouri, Mohamed & Estay, Christophe & Rault, Christophe & Roubaud, David, 2016. "Economic policy uncertainty and stock markets: Long-run evidence from the US," Finance Research Letters, Elsevier, vol. 18(C), pages 136-141.
    11. Robert F. Engle & Eric Ghysels & Bumjean Sohn, 2013. "Stock Market Volatility and Macroeconomic Fundamentals," The Review of Economics and Statistics, MIT Press, vol. 95(3), pages 776-797, July.
    12. Praetz, Peter D, 1972. "The Distribution of Share Price Changes," The Journal of Business, University of Chicago Press, vol. 45(1), pages 49-55, January.
    13. Bordo, Michael D. & Duca, John V. & Koch, Christoffer, 2016. "Economic policy uncertainty and the credit channel: Aggregate and bank level U.S. evidence over several decades," Journal of Financial Stability, Elsevier, vol. 26(C), pages 90-106.
    14. Shambaugh, George E. & Shen, Elaine B., 2018. "A clear advantage: The benefits of transparency to crisis recovery," European Journal of Political Economy, Elsevier, vol. 55(C), pages 391-416.
    15. Richard D. F. Harris & C. Coskun Küçüközmen, 2001. "The Empirical Distribution of UK and US Stock Returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(5‐6), pages 715-740, June.
    16. Sunghyun Henry Kim & M. Ayhan Kose, "undated". "Sources of Fluctuations," Working Paper 164481, Harvard University OpenScholar.
    17. Hansen, Bruce E, 1994. "Autoregressive Conditional Density Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(3), pages 705-730, August.
    18. Huang, Zhuo & Tong, Chen & Qiu, Han & Shen, Yan, 2018. "The spillover of macroeconomic uncertainty between the U.S. and China," Economics Letters, Elsevier, vol. 171(C), pages 123-127.
    19. Jean-Philippe Bouchaud, 2008. "Economics need a scientific revolution," Papers 0810.5306, arXiv.org.
    20. Wensheng Kang & Ronald A. Ratti, 2015. "Oil shocks, policy uncertainty and stock returns in China," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 23(4), pages 657-676, October.
    21. Jean-Philippe Bouchaud, 2008. "Economics needs a scientific revolution," Nature, Nature, vol. 455(7217), pages 1181-1181, October.
    22. Karnizova, Lilia & Li, Jiaxiong (Chris), 2014. "Economic policy uncertainty, financial markets and probability of US recessions," Economics Letters, Elsevier, vol. 125(2), pages 261-265.
    23. Lamoureux, Christopher G & Lastrapes, William D, 1990. "Persistence in Variance, Structural Change, and the GARCH Model," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 225-234, April.
    24. Liu, Li & Zhang, Tao, 2015. "Economic policy uncertainty and stock market volatility," Finance Research Letters, Elsevier, vol. 15(C), pages 99-105.
    25. Lee, Chien-Chiang & Lee, Chi-Chuan & Zeng, Jhih-Hong & Hsu, Yu-Ling, 2017. "Peer bank behavior, economic policy uncertainty, and leverage decision of financial institutions," Journal of Financial Stability, Elsevier, vol. 30(C), pages 79-91.
    26. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Liu, Zhenhua & Zhang, Huiying & Ding, Zhihua & Lv, Tao & Wang, Xu & Wang, Deqing, 2022. "When are the effects of economic policy uncertainty on oil–stock correlations larger? Evidence from a regime-switching analysis," Economic Modelling, Elsevier, vol. 114(C).
    2. Yi, Sun & Raghutla, Chandrashekar & Chittedi, Krishna Reddy & Fareed, Zeeshan, 2023. "How economic policy uncertainty and financial development contribute to renewable energy consumption? The importance of economic globalization," Renewable Energy, Elsevier, vol. 202(C), pages 1357-1367.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shabir Mohsin Hashmi & Muhammad Akram Gilal & Wing-Keung Wong, 2021. "Sustainability of Global Economic Policy and Stock Market Returns in Indonesia," Sustainability, MDPI, vol. 13(10), pages 1-18, May.
    2. Bakhtiar Javaheri & Fateh habibi & Ramin Amani, 2022. "Economic policy uncertainty and the US stock market trading: non-ARDL evidence," Future Business Journal, Springer, vol. 8(1), pages 1-10, December.
    3. Nguyen, Canh Phuc & Le, Thai-Ha & Su, Thanh Dinh, 2020. "Economic policy uncertainty and credit growth: Evidence from a global sample," Research in International Business and Finance, Elsevier, vol. 51(C).
    4. Kundu, Srikanta & Paul, Amartya, 2022. "Effect of economic policy uncertainty on stock market return and volatility under heterogeneous market characteristics," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 597-612.
    5. Mikhail Stolbov & Alexander Karminsky & Maria Shchepeleva, 2018. "Does Economic Policy Uncertainty Lead Systemic Risk? A Comparative Analysis of Selected European Countries," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(3), pages 332-360, September.
    6. Chang, Kuang-Liang, 2021. "Do U.S. and Japanese uncertainty shocks play important roles in affecting transition mechanisms of Japanese stock market?," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    7. Mehmet Balcilar & Godwin Oluseye Olasehinde-Williams & Muhammad Shahbaz, 2019. "Asymmetric dynamics of insurance premium: the impact of monetary policy uncertainty on insurance premiums in Japan," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 12(3), pages 233-247.
    8. Shuhua Xu & Md. Qamruzzaman & Anass Hamadelneel Adow, 2021. "Is Financial Innovation Bestowed or a Curse for Economic Sustainably: The Mediating Role of Economic Policy Uncertainty," Sustainability, MDPI, vol. 13(4), pages 1-18, February.
    9. Tihana Škrinjarić & Zrinka Orlović, 2020. "Economic Policy Uncertainty and Stock Market Spillovers: Case of Selected CEE Markets," Mathematics, MDPI, vol. 8(7), pages 1-33, July.
    10. Huang, Wei-Ling & Lin, Wen-Yuan & Ning, Shao-Lin, 2020. "The effect of economic policy uncertainty on China’s housing market," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    11. He, Feng & Wang, Ziwei & Yin, Libo, 2020. "Asymmetric volatility spillovers between international economic policy uncertainty and the U.S. stock market," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    12. Basher, Syed Abul & Haug, Alfred A. & Sadorsky, Perry, 2019. "The impact of economic policy uncertainty and commodity prices on CARB country stock market volatility," MPRA Paper 96577, University Library of Munich, Germany.
    13. Yao, Can-Zhong & Sun, Bo-Yi, 2018. "The study on the tail dependence structure between the economic policy uncertainty and several financial markets," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 245-265.
    14. Serdar Ongan & Ismet Gocer, 2017. "Testing The Causalities Between Economic Policy Uncertainty And The Us Stock Indices: Applications Of Linear And Nonlinear Approaches," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 1-20, December.
    15. Yaming Ma & Ziwei Wang & Feng He, 2022. "How do economic policy uncertainties affect stock market volatility? Evidence from G7 countries," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2303-2325, April.
    16. Das, Debojyoti & Kannadhasan, M. & Bhattacharyya, Malay, 2019. "Do the emerging stock markets react to international economic policy uncertainty, geopolitical risk and financial stress alike?," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 1-19.
    17. Nguyen Phuc Canh & Nguyen Thanh Binh & Su Dinh Thanh & Christophe Schinckus, 2020. "Determinants of foreign direct investment inflows: The role of economic policy uncertainty," International Economics, CEPII research center, issue 161, pages 159-172.
    18. Wu, Ji & Yao, Yao & Chen, Minghua & Jeon, Bang Nam, 2020. "Economic uncertainty and bank risk: Evidence from emerging economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 68(C).
    19. Lucía Morales & Bernadette Andreosso-O’Callaghan, 2018. "The Impact of Brexit on the Stock Markets of the Greater China Region," IJFS, MDPI, vol. 6(2), pages 1-19, May.
    20. Guglielmo Maria Caporale & Menelaos Karanasos & Stavroula Yfanti, 2019. "Macro-Financial Linkages in the High-Frequency Domain: The Effects of Uncertainty on Realized Volatility," CESifo Working Paper Series 8000, CESifo.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:39:y:2021:i:c:s1544612319314102. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.