Research on the Relationship between China’s Economic Policy Uncertainty and Stock Market

Abstract

Under the cycle of increasing global uncertainty, China’s stock market is facing unprecedented challenges. This article explains the interaction mechanism between China’s economic policy uncertainty (EPU) and stock market prices, and uses monthly data from January 2005 to October 2020 to conduct empirical research, and finally conducts a robustness test. The results show that there is a long-term co-integration relationship between China’s EPU and China’s stock market prices, and they are Granger causality. On the basis of the above inspection, through impulse response analysis and variance decomposition methods, it is found that the impact of China’s stock market prices on the EPU has directional changes over time, and the impact of China’s stock market price rise will cause China’s EPU decline, the period of decline lasted for 4 months, after which the EPU gradually increased. Conversely, the increase of China’s EPU will have a significant inhibitory effect on China’s stock market prices, and it will have a lagging and long-term persistence. On the whole, China’s EPU has a very severe impact on China’s stock market. It is recommended to pay attention to the transmission of economic policy formulations to the stock market’s sentiment to reduce the impact of economic policies on the stability of the stock market.