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New evidence on economic policy uncertainty and equity premium

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  • Li, Xiao-Ming

Abstract

Motivated by well-documented observations that the Chinese equity market is dominated by risk-seeking speculators with a behavioural bias, we test the hypothesis that China's economic policy uncertainty (EPU) commands a positive equity premium. We find stocks with higher EPU betas earn higher average returns, and the EPU factor-mimicking portfolio earns significant abnormal returns. Loadings on the EPU factor positively forecast the cross-section of returns on various sets of portfolios or stocks, controlling for macroeconomic and stock market uncertainty factors, conventional risk factors, and firm characteristics. Our findings are complimentary to the recently reported US evidence of a negative premium.

Suggested Citation

  • Li, Xiao-Ming, 2017. "New evidence on economic policy uncertainty and equity premium," Pacific-Basin Finance Journal, Elsevier, vol. 46(PA), pages 41-56.
    • Handle: RePEc:eee:pacfin:v:46:y:2017:i:pa:p:41-56
    DOI: 10.1016/j.pacfin.2017.08.005
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    More about this item

    Keywords

    Asset pricing; equity premium; Government policy uncertainty; Misvaluation; China;
    All these keywords.

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • N35 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - Asia including Middle East

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