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Financial risk, uncertainty and expected returns: evidence from Chinese equity markets

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  • Thomas C. Chiang

Abstract

Purpose - The purpose of this paper is to investigate the risk and economic policy uncertainty (EPU) shocks on China’s equity markets while controlling for changes in sentiments and liquidity. Design/methodology/approach - The GED-TARCH(1,1)-M procedure is used in estimations to deal with the heteroscedasticity problem. Findings - Evidence shows that stock returns are positively correlated with predictable volatility and lagged downside risk. This study indicates that the stock returns are negatively correlated with both local and global uncertainty innovations. The test results are robust across different measures of stock returns and model specifications. The global EPU innovations have more profound impact on stock returns than that of Chinese EPU. Research limitations/implications - The findings are based on the data in the China’s stock market, other global markets may be considered in the future research. Practical implications - Evidence indicates that a rise in EPU produces a negative effect on stock returns at the time news hits a market; however, investors will be rewarded by a premium as prices rebound in the subsequent period for compensating the investment decision made at a high uncertainty period. Originality/value - The excess stock returns are negatively related to the EPU innovations, regardless of whether EPU originates from a domestic source or external sources.

Suggested Citation

  • Thomas C. Chiang, 2019. "Financial risk, uncertainty and expected returns: evidence from Chinese equity markets," China Finance Review International, Emerald Group Publishing Limited, vol. 9(4), pages 425-454, July.
  • Handle: RePEc:eme:cfripp:cfri-09-2018-0129
    DOI: 10.1108/CFRI-09-2018-0129
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    Citations

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    Cited by:

    1. Chen, Xiaoyu & Chiang, Thomas C., 2020. "Empirical investigation of changes in policy uncertainty on stock returns—Evidence from China’s market," Research in International Business and Finance, Elsevier, vol. 53(C).
    2. Tihana Škrinjarić, 2021. "Profiting on the Stock Market in Pandemic Times: Study of COVID-19 Effects on CESEE Stock Markets," Mathematics, MDPI, vol. 9(17), pages 1-20, August.
    3. Gu, Rongbao & Liu, Shengnan, 2022. "Nonlinear analysis of economic policy uncertainty: Based on the data in China, the US and the global," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 593(C).
    4. Lv, Wendai & Wu, Qian, 2022. "Global economic conditions index and oil price predictability," Finance Research Letters, Elsevier, vol. 48(C).
    5. Biao Chen & Jinqiang Yang & Chuanqian Zhang, 2021. "Corporate investment and financing with uncertain growth opportunities," International Review of Finance, International Review of Finance Ltd., vol. 21(3), pages 821-842, September.
    6. Xu, Jin & Huang, Shoujun & Shi, Lu & Sharma, Susan Sunila, 2021. "Trade conflicts and energy firms' market values: Evidence from China," Energy Economics, Elsevier, vol. 101(C).
    7. Tan, Zhengxun & Xiao, Binuo & Huang, Yilong & Zhou, Li, 2021. "Value at risk and return in Chinese and the US stock markets: Double long memory and fractional cointegration," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).

    More about this item

    Keywords

    Downside risk; Chinese stock market; Economic policy uncertainty; G11; G12; G15;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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