Stock illiquidity and economic policy uncertainty in Chinese security market

This study examines the effect of economic policy uncertainty (EPU) on stock illiquidity and identifies its endogenous and exogenous determinants for the sensitivity of stock illiquidity to EPU. The findings demonstrate that EPU increases stock illiquidity. However, the impact of stock and firm attributes on EPU’s effect on stock illiquidity differs notably from patterns observed in other countries. Additionally, higher investor sentiment reduces EPU’s impact on stock illiquidity. Notably, EPU’s effect on stock illiquidity significantly decreases as stock market returns rise. Mechanisms such as delisting risk warnings and the registration-based IPO regime help mitigate EPU’s effects on stock illiquidity. Conversely, the margin trading and short selling mechanism does not consistently change the impact of EPU on stock illiquidity. All empirical results have been rigorously tested for robustness. This study contributes to both empirical and theoretical research on systematic risk, as well as on endogenous and exogenous determinants of risk contagion from EPU to stock illiquidity.