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Firm-level economic policy uncertainty perception and stock volatility dynamics: Evidence from a panel GARCH-MIDAS model

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  • Liu, Yinong
  • Li, Yanying
  • Li, Haohua

Abstract

Economic policy uncertainty (EPU) is a key driver of market volatility, while the majority of current indicators are derived from macroeconomic events rather than firm-level perceptions. This paper develops a novel firm-level economic policy uncertainty (FEPU) measurement for Chinese listed companies by applying multinomial inverse regression (MNIR). Furthermore, we propose a panel GARCH-MIDAS model that integrates low-frequency firm-level policy uncertainty with high-frequency stock return data to jointly capture long-term policy-driven volatility and firm-specific short-term dynamics across 50 Chinese listed companies. Our empirical results indicate that higher policy uncertainty exerts a stabilizing effect on long-term volatility. This phenomenon may be attributed to proactive regulatory interventions aimed at mitigating systemic risk during uncertain periods, as well as a strategic shift by institutional investors toward defensive, low-volatility assets, thereby dampening overall market fluctuations. Overall, this paper provides insights into the influence of information disclosure on market risk dynamics.

Suggested Citation

  • Liu, Yinong & Li, Yanying & Li, Haohua, 2026. "Firm-level economic policy uncertainty perception and stock volatility dynamics: Evidence from a panel GARCH-MIDAS model," Finance Research Letters, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finlet:v:87:y:2026:i:c:s1544612325022494
    DOI: 10.1016/j.frl.2025.108996
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