Impact of Economic Policy Uncertainty on the Distribution of China’s Stock Returns: An External Perspective
Yanyun Yao*, Haijing Yu**, Huimin Wang*, and Tsung-Kuo Tien-Liu***
*Department of Applied Statistics, Shaoxing University
900 Chengnan Avenue, Yuecheng District, Shaoxing, Zhejiang 312000, China
**Research Institute of Economic Statistics and Quantitative Economics, Zhejiang Gongshang University
18 Xuezheng Road, Xiasha University Town, Hangzhou, Zhejiang 310018, China
***Office of Physical Education, Fu Jen Catholic University
8F.-2, No.127 Dazhong South Street, West District, Taichung City 40347, Taiwan
This study examines the impact of external economic policy uncertainty on the distribution of China’s stock returns. The Chinese Economic Policy Uncertainty (CEPU) and global EPU (GEPU) indexes compiled by  are employed as a measurement of the external uncertainty. An empirical study is conducted using the GARCH-MIDAS framework. The first innovation of this study is extending the symmetric GARCH-MIDAS model to the case of GJR; the leverage effect is therefore considered. The second innovation is considering the impact of EPU on the overall distribution of returns, rather than on the mean or volatility. Full-sample fitting shows that CEPU can explain around 14% of the return volatility, and CEPU together with GEPU can explain about 17%. Out-of-sample recursive forecasting demonstrates that it is meaningful to extend the models to GJR; the EPU information improves the return distribution forecasting. However, the impact of EPUs is limited, which implies that external uncertainty is quite different from the “internal” economic policy uncertainty directly driving the China’s stock market.
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