IDEAS home Printed from https://ideas.repec.org/a/eee/phsmap/v461y2016icp92-100.html
   My bibliography  Save this article

The dynamic correlation between policy uncertainty and stock market returns in China

Author

Listed:
  • Yang, Miao
  • Jiang, Zhi-Qiang

Abstract

The dynamic correlation is examined between government’s policy uncertainty and Chinese stock market returns in the period from January 1995 to December 2014. We find that the stock market is significantly correlated to policy uncertainty based on the results of the Vector Auto Regression (VAR) and Structural Vector Auto Regression (SVAR) models. In contrast, the results of the Dynamic Conditional Correlation Generalized Multivariate Autoregressive Conditional Heteroscedasticity (DCC-MGARCH) model surprisingly show a low dynamic correlation coefficient between policy uncertainty and market returns, suggesting that the fluctuations of each variable are greatly influenced by their values in the preceding period. Our analysis highlights the understanding of the dynamical relationship between stock market and fiscal and monetary policy.

Suggested Citation

  • Yang, Miao & Jiang, Zhi-Qiang, 2016. "The dynamic correlation between policy uncertainty and stock market returns in China," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 461(C), pages 92-100.
    • Handle: RePEc:eee:phsmap:v:461:y:2016:i:c:p:92-100
    DOI: 10.1016/j.physa.2016.05.019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437116302047
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000
    File URL: https://libkey.io/10.1016/j.physa.2016.05.019?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. Ben S. Bernanke & Kenneth N. Kuttner, 2005. "What Explains the Stock Market's Reaction to Federal Reserve Policy?," Journal of Finance, American Finance Association, vol. 60(3), pages 1221-1257, June.
    2. Helmut Lütkepohl, 2005. "New Introduction to Multiple Time Series Analysis," Springer Books, Springer, number 978-3-540-27752-1, November.
    3. Schwert, G William, 2002. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 5-17, January.
    4. Kim, Chansog (Francis) & Pantzalis, Christos & Chul Park, Jung, 2012. "Political geography and stock returns: The value and risk implications of proximity to political power," Journal of Financial Economics, Elsevier, vol. 106(1), pages 196-228.
    5. Kang, Wensheng & Lee, Kiseok & Ratti, Ronald A., 2014. "Economic policy uncertainty and firm-level investment," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 42-53.
    6. Antonakakis, Nikolaos & Chatziantoniou, Ioannis & Filis, George, 2013. "Dynamic co-movements of stock market returns, implied volatility and policy uncertainty," Economics Letters, Elsevier, vol. 120(1), pages 87-92.
    7. Andrew C. Worthington, 2009. "Political Cycles in the Australian Stock Market since Federation," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(4), pages 397-409, December.
    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. Xu, Yongan & Wang, Jianqiong & Chen, Zhonglu & Liang, Chao, 2021. "Economic policy uncertainty and stock market returns: New evidence," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    2. Muhammad Asif Khan & Masood Ahmed & József Popp & Judit Oláh, 2020. "US Policy Uncertainty and Stock Market Nexus Revisited through Dynamic ARDL Simulation and Threshold Modelling," Mathematics, MDPI, vol. 8(11), pages 1-20, November.
    3. Mehmet Balcilar & George Ike & Rangan Gupta, 2022. "The Role of Economic Policy Uncertainty in Predicting Output Growth in Emerging Markets: A Mixed-Frequency Granger Causality Approach," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 58(4), pages 1008-1026, March.
    4. He, Feng & Ma, Yaming & Zhang, Xiaojie, 2020. "How does economic policy uncertainty affect corporate Innovation?–Evidence from China listed companies," International Review of Economics & Finance, Elsevier, vol. 67(C), pages 225-239.
    5. Ranajit Kumar Bairagi, 2022. "Dynamic Impacts of Economic Policy Uncertainty on Australian Stock Market: An Intercontinental Evidence," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 21(1), pages 64-91, March.
    6. 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.
    7. Shao, Ying-Hui & Yang, Yan-Hong & Zhou, Wei-Xing, 2022. "How does economic policy uncertainty comove with stock markets: New evidence from symmetric thermal optimal path method," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 604(C).
    8. 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.
    9. Gu, Huaying & Liu, Zhixue & Weng, Yingliang, 2017. "Time-varying correlations in global real estate markets: A multivariate GARCH with spatial effects approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 471(C), pages 460-472.
    10. Khalfaoui, Rabeh, 2018. "Oil–gold time varying nexus: A time–frequency analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 503(C), pages 86-104.
    11. Canh P. Nguyen & Christophe Schinckus & Thanh D. Su & Felicia H. L. Chong, 2022. "Determinants of stock market returns in emerging markets: The linkage between institutional quality and macro liquidity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4472-4486, October.
    12. Nivorozhkin, Eugene & Chondrogiannis, Ilias, 2022. "Shifting balances of systemic risk in the Chinese banking sector: Determinants and trends," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 76(C).
    13. Yu, Xiaoling & Huang, Yirong, 2021. "The impact of economic policy uncertainty on stock volatility: Evidence from GARCH–MIDAS approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 570(C).
    14. Shabeer Khan & Mirzat Ullah & Mohammad Rahim Shahzad & Uzair Abdullah Khan & Umair Khan & Sayed M. Eldin & Abeer M. Alotaibi, 2022. "Spillover Connectedness among Global Uncertainties and Sectorial Indices of Pakistan: Evidence from Quantile Connectedness Approach," Sustainability, MDPI, vol. 14(23), pages 1-16, November.
    15. 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.
    16. Xiong, Xiong & Bian, Yuxiang & Shen, Dehua, 2018. "The time-varying correlation between policy uncertainty and stock returns: Evidence from China," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 499(C), pages 413-419.
    17. Phan, Dinh Hoang Bach & Sharma, Susan Sunila & Tran, Vuong Thao, 2018. "Can economic policy uncertainty predict stock returns? Global evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 55(C), pages 134-150.
    18. Yang, Jianlei & Yang, Chunpeng & Hu, Xiaoyi, 2021. "Economic policy uncertainty dispersion and excess returns: Evidence from China," Finance Research Letters, Elsevier, vol. 40(C).
    19. 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).
    20. Susilo Nur Aji Cokro Darsono & Wing-Keung Wong & Tran Thai Ha Nguyen & Dyah Titis Kusuma Wardani, 2022. "The Economic Policy Uncertainty and Its Effect on Sustainable Investment: A Panel ARDL Approach," JRFM, MDPI, vol. 15(6), pages 1-17, June.
    21. Adeel Riaz & Ouyang Hongbing & Shujahat Haider Hashmi & Muhammad Asif Khan, 2018. "The Impact of Economic Policy Uncertainty on US Transportation Sector Stock Returns," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 8(4), pages 163-170, October.
    22. Das, Debojyoti & Kumar, Surya Bhushan, 2018. "International economic policy uncertainty and stock prices revisited: Multiple and Partial wavelet approach," Economics Letters, Elsevier, vol. 164(C), pages 100-108.
    23. 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.

    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. Xiong, Xiong & Bian, Yuxiang & Shen, Dehua, 2018. "The time-varying correlation between policy uncertainty and stock returns: Evidence from China," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 499(C), pages 413-419.
    2. Gilles Dufrénot & William Ginn & Marc Pourroy, 2023. "ENSO Climate Patterns on Global Economic Conditions," AMSE Working Papers 2308, Aix-Marseille School of Economics, France.
    3. Kühl, Michael, 2007. "Cointegration in the foreign exchange market and market efficiency since the introduction of the Euro: Evidence based on bivariate cointegration analyses," University of Göttingen Working Papers in Economics 68, University of Goettingen, Department of Economics.
    4. Vural-Yavaş, Çiğdem, 2020. "Corporate risk-taking in developed countries: The influence of economic policy uncertainty and macroeconomic conditions," Journal of Multinational Financial Management, Elsevier, vol. 54(C).
    5. Stavros Degiannakis & George Filis, 2019. "Forecasting European economic policy uncertainty," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(1), pages 94-114, February.
    6. Ribeiro Scarcioffolo, Alexandre & Etienne, Xiaoli L., 2018. "Does Economic Policy Uncertainty Affect Energy Market Volatility and Vice-Versa?," 2018 Annual Meeting, August 5-7, Washington, D.C. 273976, Agricultural and Applied Economics Association.
    7. Degiannakis, Stavros & Filis, George & Panagiotakopoulou, Sofia, 2018. "Oil price shocks and uncertainty: How stable is their relationship over time?," Economic Modelling, Elsevier, vol. 72(C), pages 42-53.
    8. Chiang, Thomas C., 2021. "Spillovers of U.S. market volatility and monetary policy uncertainty to global stock markets," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    9. Guan-Ru Chen & Ming-Hung Wu, 2013. "How does Monetary Policy Influence Capital Markets? Using a Threshold Regression Model," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(1), pages 31-47, March.
    10. Bekiros, Stelios & Gupta, Rangan & Majumdar, Anandamayee, 2016. "Incorporating economic policy uncertainty in US equity premium models: A nonlinear predictability analysis," Finance Research Letters, Elsevier, vol. 18(C), pages 291-296.
    11. Christou, Christina & Gupta, Rangan, 2020. "Forecasting equity premium in a panel of OECD countries: The role of economic policy uncertainty," The Quarterly Review of Economics and Finance, Elsevier, vol. 76(C), pages 243-248.
    12. Smales, Lee A., 2020. "Examining the relationship between policy uncertainty and market uncertainty across the G7," International Review of Financial Analysis, Elsevier, vol. 71(C).
    13. Naoyuki Yoshino & Farhad Taghizadeh-Hesary & Ali Hassanzadeh & Ahmad Danu Prasetyo, 2014. "Response of Stock Markets to Monetary Policy : An Asian Stock Market Perspective," Finance Working Papers 24516, East Asian Bureau of Economic Research.
    14. Oguz Ersan & Sagi Akron & Ender Demir, 2019. "The effect of European and global uncertainty on stock returns of travel and leisure companies," Tourism Economics, , vol. 25(1), pages 51-66, February.
    15. Schleer, Frauke & Semmler, Willi, 2013. "Financial sector-output dynamics in the euro area: Non-linearities reconsidered," ZEW Discussion Papers 13-068, ZEW - Leibniz Centre for European Economic Research.
    16. Chin Chia Liang & Carol Troy & Ellen Rouyer, 2020. "The Stock Price Impact of Domestic and Foreign Economic Policy Uncertainty: Evidence from China," Economics Bulletin, AccessEcon, vol. 40(2), pages 1747-1755.
    17. Adeel Riaz & Ouyang Hongbing & Shujahat Haider Hashmi & Muhammad Asif Khan, 2018. "The Impact of Economic Policy Uncertainty on US Transportation Sector Stock Returns," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 8(4), pages 163-170, October.
    18. Yifei Cai, 2018. "Predictive Power of us Monetary Policy Uncertainty Shock on Stock Returns in Australia and New Zealand," Australian Economic Papers, Wiley Blackwell, vol. 57(4), pages 470-488, December.
    19. Wen, Fenghua & Shui, Aojie & Cheng, Yuxiang & Gong, Xu, 2022. "Monetary policy uncertainty and stock returns in G7 and BRICS countries: A quantile-on-quantile approach," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 457-482.
    20. Lee, Jungho & Xu, Jianhuan, 2019. "Tax uncertainty and business activity," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 158-184.

    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:phsmap:v:461:y:2016:i:c:p:92-100. 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.journals.elsevier.com/physica-a-statistical-mechpplications/ .

    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.