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Geopolitical risk, economic policy uncertainty and asset returns in Chinese financial markets

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  • Thomas C. Chiang

Abstract

Purpose - This paper investigates the impact of a change in economic policy uncertainty(ΔEPUt)and the absolute value of a change in geopolitical risk(|ΔGPRt|)on the returns of stocks, bonds and gold in the Chinese market. Design/methodology/approach - The paper uses Engle's (2009) dynamic conditional correlation (DCC) model and Chiang's (1988) rolling correlation model to generate correlations of asset returns over time and analyzes their responses to(ΔEPUt)and |ΔGPRt|. Findings - Evidence shows that stock-bond return correlations are negatively correlated toΔEPUt, whereas stock-gold return correlations are positively related to the|ΔGPRt|,but negatively correlated withΔEPUt.This study finds evidence that stock returns are adversely related to the risk/uncertainty measured by downside risk, ΔEPUtand |ΔGPRt|, whereas the bond return is positively related to a rise inΔEPUt; the gold return is positively correlated with a heightened|ΔGPRt|. Research limitations/implications - The findings are based entirely on the data for China's asset markets; further research may expand this analysis to other emerging markets, depending on the availability of GPR indices. Practical implications - Evidence suggests that the performance of the Chinese market differs from advanced markets. This study shows that gold is a safe haven and can be viewed as an asset to hedge against policy uncertainty and geopolitical risk in Chinese financial markets. Social implications - This study identify the special role for the gold prices in response to the economic policy uncertainty and the geopolitical risk. Evidence shows that stock and bond return correlation is negatively related to the ΔEPU and support the flight-to-quality hypothesis. However, the stock-gold return correlation is positively related to |ΔGPR|, resulting from the income or wealth effect. Originality/value - The presence of a dynamic correlations between stock-bond and stock-gold relations in response to ΔEPUtand |ΔGPRt|has not previously been tested in the literature. Moreover, this study finds evidence that bond-gold correlations are negatively correlated to bothΔEPUtand |ΔGPRt|.

Suggested Citation

  • Thomas C. Chiang, 2021. "Geopolitical risk, economic policy uncertainty and asset returns in Chinese financial markets," China Finance Review International, Emerald Group Publishing Limited, vol. 11(4), pages 474-501, March.
  • Handle: RePEc:eme:cfripp:cfri-08-2020-0115
    DOI: 10.1108/CFRI-08-2020-0115
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    Citations

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    Cited by:

    1. Zhang, Wenwen & Cao, Shuo & Zhang, Xuan & Qu, Xuefeng, 2023. "COVID-19 and stock market performance: Evidence from the RCEP countries," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 717-735.
    2. Kong, Dongmin & Yang, Yiwei & Wang, Qin, 2023. "Innovative efficiency and firm value: Evidence from China," Finance Research Letters, Elsevier, vol. 52(C).
    3. Zhang, Zhikai & Wang, Yudong & Xiao, Jihong & Zhang, Yaojie, 2023. "Not all geopolitical shocks are alike: Identifying price dynamics in the crude oil market under tensions," Resources Policy, Elsevier, vol. 80(C).
    4. Wei, Xin & Liu, Xi & Zhang, Xueyong, 2022. "Shadow banking and the cross-section of stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    5. Wei, Yu & Wang, Yizhi & Lucey, Brian M. & Vigne, Samuel A., 2023. "Cryptocurrency uncertainty and volatility forecasting of precious metal futures markets," Journal of Commodity Markets, Elsevier, vol. 29(C).
    6. Xie, Yutang & Cao, Yujia & Li, Xiaotao, 2023. "The importance of trade policy uncertainty to energy consumption in a changing world," Finance Research Letters, Elsevier, vol. 52(C).
    7. Liu, Jing & Chen, Zhonglu, 2023. "How do stock prices respond to the leading economic indicators? Analysis of large and small shocks," Finance Research Letters, Elsevier, vol. 51(C).
    8. Du, Yuqiu & Wang, Wendi, 2023. "The role of green financing, agriculture development, geopolitical risk, and natural resource on environmental pollution in China," Resources Policy, Elsevier, vol. 82(C).
    9. He, Mengxi & Zhang, Yaojie, 2022. "Climate policy uncertainty and the stock return predictability of the oil industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    10. Chen, Zhonglu & Zhang, Li & Weng, Chen, 2023. "Does climate policy uncertainty affect Chinese stock market volatility?," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 369-381.
    11. Zhang, Zhikai & Wang, Yudong & Li, Bin, 2023. "Asymmetric spillover of geopolitical risk and oil price volatility: A global perspective," Resources Policy, Elsevier, vol. 83(C).
    12. Foglia, Matteo & Palomba, Giulio & Tedeschi, Marco, 2023. "Disentangling the geopolitical risk and its effects on commodities. Evidence from a panel of G8 countries," Resources Policy, Elsevier, vol. 85(PB).
    13. Lin, Nan & Li, Ao & Ke, Jinjun & Yuan, Jiayue & Chen, Han, 2023. "The governance role of corporate party organization on innovation," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 657-670.
    14. Lv, Wendai & Qi, Jipeng & Feng, Jing, 2023. "Economic policy uncertainty and environmental governance company volatility: Evidence from China," Research in International Business and Finance, Elsevier, vol. 64(C).
    15. Hu, Guoheng & Liu, Shan & Wu, Guo & Hu, Peng & Li, Ruiqi & Chen, Liujie, 2023. "Economic policy uncertainty, geopolitical risks, and the heterogeneity of commodity price fluctuations in China ——an empirical study based on TVP-SV-VAR model," Resources Policy, Elsevier, vol. 85(PA).

    More about this item

    Keywords

    Stock–bond return correlation; Stock-gold return correlation; Downside risk; Economic policy uncertainty; Geopolitical risk; Safe haven; G10; G11; G14; G15;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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