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Economic policy uncertainty, investor sentiment and financial stability—an empirical study based on the time varying parameter-vector autoregression model

Author

Listed:
  • Xin-Zhou Qi

    (Fudan University)

  • Zhong Ning

    (Fudan University)

  • Meng Qin

    (Party School of the Central Committee of the Communist Party of China)

Abstract

This paper applies the time varying parameter-vector autoregression model to explore the dynamic relationship between economic policy uncertainty, investor sentiment and financial stability in China in different periods and at different time points. The empirical results show that economic policy uncertainty has an obvious negative impact on investor sentiment before 2012 and financial stability in the short term, and the influence of economic policy uncertainty on investor sentiment is greater than that of economic policy uncertainty on financial stability. These influences were more significant during the period of the global financial crisis in 2008. Moreover, investor sentiment had a positive and gradually increasing effect on financial stability, while after 2010, the positive impact gradually weakened. Furthermore, economic policy uncertainty is negatively affected by financial stability, and the effect of financial stability on investor sentiment is positive. In terms of mediating effects, economic policy uncertainty has an indirect impact on financial stability through investor sentiment and vice versa. This paper provides a new solution to economic problems explored in behavioral finance research. Additionally, Chinese government agencies can achieve the goal of preventing financial crises and maintaining financial stability by monitoring investor sentiment and implementing targeted economic policies.

Suggested Citation

  • Xin-Zhou Qi & Zhong Ning & Meng Qin, 2022. "Economic policy uncertainty, investor sentiment and financial stability—an empirical study based on the time varying parameter-vector autoregression model," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(3), pages 779-799, July.
    • Handle: RePEc:spr:jeicoo:v:17:y:2022:i:3:d:10.1007_s11403-021-00342-5
    DOI: 10.1007/s11403-021-00342-5
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    References listed on IDEAS

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    Cited by:

    1. Yunpeng Su & Jia Li & Baochen Yang & Yunbi An, 2024. "The Impacts of Policy Uncertainty on Asset Prices: Evidence from China’s Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 31(4), pages 1087-1133, December.
    2. Afreen Sorathiya & Pradnya Saval & Manha Sorathiya, 2024. "Data-Driven Sustainable Investment Strategies: Integrating ESG, Financial Data Science, and Time Series Analysis for Alpha Generation," IJFS, MDPI, vol. 12(2), pages 1-23, April.
    3. Fadekemi Chidinma Adeloye & Olayinka Olawoyin & Chinaemerem Daniel, 2024. "Economic Policy Uncertainty and Financial Markets in the United State," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(6), pages 998-1016, June.
    4. Wu, Jie & Rasool, Zeeshan & Ali, Sajid & Nazar, Raima, 2024. "Between policy swings and financial shockwaves: Asymmetric impact of economic policy uncertainty on financial stability in high-volatility nations," Socio-Economic Planning Sciences, Elsevier, vol. 95(C).
    5. Ihsen Abid & Salha Ben Salem & Wajdi Frikha, 2024. "Impact of political instability of monetary policy conduct and economic activity recovery: empirical investigation," SN Business & Economics, Springer, vol. 4(12), pages 1-18, December.
    6. Norashikin Adam & Norzahidah Yacob & Wan Rasyidah Wan Musa & Khairunnisa’ Yussof & Siti Musliha Mohd Idris, 2024. "The Effect of Global Economic Policy Uncertainty on Selected Islamic Stock Market Returns," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(10), pages 195-210, October.
    7. Qiao, Xingzhi & Zhu, Huiming & Zhang, Zhongqingyang & Mao, Weifang, 2022. "Time-frequency transmission mechanism of EPU, investor sentiment and financial assets: A multiscale TVP-VAR connectedness analysis," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Economic policy uncertainty; Investor sentiment; Financial stability; Time varying parameter-vector autoregression model;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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