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Chinese Economic Policy Uncertainty and the Cross-Section of U.S. Asset Returns

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  • Lee, Kiryoung
  • Jeon, Yoontae
  • Nam, Eun-Young

Abstract

We find that Chinese EPU shocks can explain 40% of the cross-sectional variation in bond returns. We also find that Chinese EPU shocks command a significant negative risk premia. In contrast to a strong explanatory power for bond markets, we do not find meaningful pricing power of Chinese EPU for equity markets. We argue and provide supporting empirical evidence that this result is attributable to the fact that Chinese EPU has a strong influence on the U.S. economy mainly during recessions. Overall, our findings suggest that a foreign EPU shock could be a potentially important factor in explaining bond returns.

Suggested Citation

  • Lee, Kiryoung & Jeon, Yoontae & Nam, Eun-Young, 2021. "Chinese Economic Policy Uncertainty and the Cross-Section of U.S. Asset Returns," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1063-1077.
    • Handle: RePEc:eee:reveco:v:76:y:2021:i:c:p:1063-1077
    DOI: 10.1016/j.iref.2021.08.011
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    More about this item

    Keywords

    Chinese economic policy uncertainty; Cross-section of bond returns; Global economy; VIX; ICAPM;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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