Does economic policy uncertainty impact the mean–variance relation? Evidence from China

ABSTRACT

This study shows the impact of economic policy uncertainty (EPU) on the mean–variance relation. Using the news-based EPU index of China, we discover the significant effect of EPU on the mean–variance relation of the Chinese stock market. Besides, our empirical findings reveal that the influence of EPU on the market’s mean–variance relation is time-varying. During the low-EPU periods, the stock market’s excess return is positively related to conditional variance; during the high-EPU periods, the stock market’s excess return is negatively related to conditional variance. Furthermore, our results are robust across different conditional variance models as well as controlling for Fama–French three factors of the Chinese stock market.

KEYWORDS:

• Economic policy uncertainty
• government policy
• mean–variance relation
• time-varying effect

JEL CLASSIFICATION:

• G1.

Acknowledgments

All authors are grateful to the editor, anonymous reviewers for suggestions and comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Wind is the provider of financial data, information and services in mainland China. Wind has built up a top-tier financial database focusing on securities data, with a wide coverage of equities, funds, bonds, foreign exchanges, insurance, futures, derivatives, commodities, macro economy and financial news. The timely updated information is always there to satisfy institutional investors’ diversified needs. Knowing the demand diversification among investment institutions, research institutes, academic institutes and government bodies, Wind has developed series of professional analytics and applications for indexing, data extraction and analysis, portfolio management and many other areas. With all these tools, users could get real-time, accurate and complete financial data and information and the analytical results.

² We downloaded the EPU index data from web site Scott R. Baker, Nick Bloom and Steven J. Davis. The index data are regularly updated on www.policyuncertainty.com.

³ RESSET Financial Research Database (RESSET) is mainly for colleges and universities, financial research institutions, research departments of financial enterprises in China, providing support for empirical research and model test. RESSET is designed by numerous experts from Tsinghua University, Peking University, and the London School of Economics.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71471067].