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The Impacts of Policy Uncertainty on Asset Prices: Evidence from China’s Market

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Abstract

We employ the "Two Sessions," comprising the National People’s Congress and the Chinese People’s Political Consultative Conference, as a proxy for measuring policy uncertainty. In our analysis, we utilize a regression model, the three-path mediated effect framework, and the Campbell and Shiller decomposition method to delve into the influence of policy uncertainty on asset pricing within China’s financial market. Our findings reveal an increase in stock returns during the months leading up to the "Two Sessions," evident at both the market and firm levels. Notably, the extent to which stock returns respond to policy uncertainty is contingent on various firm-specific characteristics, including ownership structure, company size, and profitability. Furthermore, our investigation confirms that investor sentiment serves as a complete mediator in the relationship between policy uncertainty and its impact on asset prices. Additionally, we identify future cash flow as the primary conduit through which policy uncertainty directly exerts its influence on asset prices.

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Acknowledgements

This work is supported by the National Natural Science Foundation of China (Grant Nos. 71501140 and 71471129) and Tianjin Philosophy and Social Science Planning Project (Grant No. TJGL19-018).

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Authors and Affiliations

  1. College of Management and Economics, Tianjin University, 92 Weijin Road, Tianjin, 300072, China

    Yunpeng Su, Jia Li & Baochen Yang

  2. Odette School of Business, University of Windsor, Windsor, Ontario, N9B 3P4, Canada

    Yunbi An

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Appendix. Variable Definitions

Appendix. Variable Definitions

Variable

definition and data source

Return

Monthly realized stock return in the Shanghai or Shenzhen composite index, \(Return_{t} = ln(P_{t}/P_{t-1})\), which Pt means the stock closing price in the t period. Source: CSMAR

ReturnFirm

Monthly realized firm’s stock returns considering cash dividend reinvestment. Source: CSMAR

eCFmarket level

Monthly cash flow news decomposed by Shanghai (or Shenzhen) composite index return innovation

eDRmarket level

Monthly discount rate news decomposed by Shanghai (or Shenzhen) composite index return innovation

Volatility

The standard deviation of daily returns in the market index within a month. Source: CSMAR

Bill

Monthly treasury bond yields for three-month. Source: CSMAR

Term

The Monthly spread between 3-month and 10-year China Treasury bond yields. Source: CSMAR

Default

The Monthly spread between five-year AAA corporate bond and government bond yields

Gap

Monthly output gap. Source: National Bureau of Statistics in China

B/M

Monthly book-to-market at the firm level. Source: CSMAR

Size

The Monthly logarithm of total assets at the firm level. Source: CSMAR

Leverage

The Monthly ratio of long-term debt to total assets at the firm level. Source: CSMAR

ROA

The Monthly ratio of return on assets at the firm level. Source: CSMAR

VolatilityFirm

The standard deviation of daily returns in firms within a month. Source: CSMAR

eCF Firm level

Monthly cash flow news decomposed by firm return innovation

eDR Firm level

Monthly discount rate news decomposed by firm return innovation

NPCt

NPCt = 1 if month t is in the window of t months before the “Two Sessions” and zero otherwise

NPC1m

The value of month t is one if month t is in the window of 1 month before the “Two Sessions” and zero otherwise. Source: China Government Network

NPC2m

The value of month t is one if month t is in the window of 2 months before the “Two Sessions” and zero otherwise. Source: China Government Network

NPC3m

The value of month t is one if month t is in the window of 3 months before the “Two Sessions” and zero otherwise. Source: China Government Network

CCI

Monthly consumer confidence index. Source: CSMAR

TURNOVER

Monthly average turnover in the Shanghai stock market. Source: CSMAR

MAADL

Monthly average A.D. Line (Advance-Decline) index in Shanghai A-share. Source: CSMAR

NIG

Monthly investor account opening growth rate. Source: CSMAR

NHL

The monthly average difference between a new high and a new low in Shanghai A-share. Source: CSMAR

Sent

The monthly investor sentiment composite indicator is calculated by the weighted factor score

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Su, Y., Li, J., Yang, B. et al. The Impacts of Policy Uncertainty on Asset Prices: Evidence from China’s Market. Asia-Pac Financ Markets (2023). https://doi.org/10.1007/s10690-023-09442-7

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