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Economic policy uncertainty and stock market activity: Evidence from China

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  • Lei, Adrian C.H.
  • Song, Chen

Abstract

The effects of various China economic policy uncertainty (EPU) indices on Chinese listed firms' stock price behavior are examined in this study. We find that the mass media in China-based index is the best indicator of stock price crash risk for Chinese A- or B-share listings, but the index based on independent Chinese media is better for H-share listings. Chinese firms face a greater risk of stock price crashes during high EPU periods, but for B-share listings this relationship becomes negative after more media coverage is considered. We follow Baker, Bloom, and Davis (2016) and construct an EPU measure for the Chinese economy based on a Chinese character search of newspapers. We compare our EPU index with the BBD index of Baker, Bloom, and Davis (2016), which is based on an English-language Hong Kong news source. We find that the BBD index is a reasonable proxy for China's EPU but that it omits some useful information. We further demonstrate that our EPU index predicts China's economic trends more effectively than the BBD index, particularly when based on mass media in China.

Suggested Citation

  • Lei, Adrian C.H. & Song, Chen, 2022. "Economic policy uncertainty and stock market activity: Evidence from China," Global Finance Journal, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:glofin:v:52:y:2022:i:c:s1044028320302817
    DOI: 10.1016/j.gfj.2020.100581
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    More about this item

    Keywords

    Economic policy uncertainty (EPU); Stock price crash; China's economic trend;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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