Research On The Impact Of Economic Policy Uncertainty On The Stock Market Co-movement And Risk Spillover:Evidence From China

Due to the ravages of COVID-19,the decoupling of global supply chains,and the ever-changing digital economy and technology,the development of the global economy and politics,the Chinese stock market is confronted with an unprecedented external environment of uncertainty.Among these uncertainties,economic policy uncertainty has a prominent influence on the return and volatility of stocks.Currently,China is undergoing a significant transition from a planned economy to a socialist market economy system.The government’s economic policy plays a very important role in the operation of the stock market.However,the opaqueness and inconsistency of the formulation process of economic policies have led to market participants’ uncertainty about the future,resulting in uncertain psychological expectations.The Economic Policy Uncertainty Index(EPU Index)compiled by Baker et al.shows that since the financial crisis in 2008,the economic policy uncertainty level has shown a turbulent upward trend in China.Relevant studies have shown that economic policy uncertainty will significantly impact stock market returns and volatility.Few literature has conducted in-depth discussions on the impact of economic policy uncertainty on the co-movement and risk spillovers of stock market.The stock market co-movement refers to the movement in the same or the opposite direction of asset returns in the stock market,which is an important channel for risk contagion and spread.With the continuous advancement of reform and opening up,the circulation of capital and information has been significantly improved in the Chinese stock market.As a result,the co-movement of the domestic stock market has been enhanced.Once affected by external factors,the stock market will fluctuate violently.It will be contagious and expanded through its linkage mechanism,significantly increasing the risk level of the stock market and even triggering a financial crisis.The factors on stock market co-movement and risk spillover is carried out from macroeconomy and microeconomic characteristics in the existing literature.Few pieces of literature have explored the impact on stock market co-movement and risk spillover from economic policy uncertainty.In addition,although some studies have found that investor sentiment plays a role as a transmission channel between economic policy uncertainty and stock returns and volatility,there is no research on its channel mechanism between economic policy uncertainty and the stock market co-movement and risk spillovers.This paper links economic policy uncertainty with stock market co-movement and risk spillovers and actively explores the impact of economic policy uncertainty on stock price synchronicity,risk spillovers between the financial and real industries,and systemic financial risks.Based on investor sentiment,we further reveals and verifies its role as a channel between economic policy uncertainty and stock market co-movement and risk spillovers.In Chapter 3,we use the fixed-effect model to verify how economic policy uncertainty affects the stock price synchronicity.And based on the perspective of market and individual investor sentiment,the method of multiple mediation effects is used to characterize and test the transmission mechanism of economic policy uncertainty.The main conclusions are as follows: firstly,the economic policy uncertainty has a significant positive impact on the stock price synchronization in China.Secondly,the economic policy uncertainty will further increase the impact on stock price synchronization through investor sentiment.In the part of heterogeneity analysis,It is found that the monetary policy uncertainty is an important factor for stock prices synchronicity in China.And when the company’s emotional sensitivity and the industry competition are higher,the impact of economic policy uncertainty on the stock price synchronicity is more remarkable.In Chapter 4,this paper not only uses the DCC-MVGARCH model to estimate the volatility co-movement between the financial industry and the actual industry and carried out the dynamic analysis of the inter-industry network model,but also uses the fixed effect model to verify the effect of economic policy uncertainty on the risk spillovers based on the Co Va R.Further,from the perspective of market sentiment,we use the mediating effect method to characterize and test the transmission mechanism of economic policy uncertainty.The main conclusions are as follows: firstly,the volatility co-movement between the financial and the real industry is high,and the network structure between industries shows a state of alternating dense and sparse.Secondly,economic policy uncertainty has a significant positive impact on risk spillovers between them.Thirdly,economic policy uncertainty will further expand the impact of investor sentiment on risk spillovers.In the part of heterogeneity analysis,we find that monetary policy uncertainty is essential for risk spillover and the lower the economic growth rate,the more significant impact of economic policy uncertainty on the risk spillover.In Chapter 5,this paper firstly proposed a new model for estimating Conditional Expected Shortfall with the combination of the Extreme Value Theory and the Time-varying Mixture Copula Model,DM-Copula-EVT model.And a new back-testing analysis to test whether the CoES model is correct or not is also proposed.Based on the application of the model to financial market,we use a fixedeffect model to verify the impact of economic policy uncertainty on the contribution of financial institutions to systemic risk.And based on the research perspective of market sentiment,the mediation effect method is used to characterize and test the transmission mechanism of economic policy uncertainty.The main conclusions are as follows: firstly,the new method can pass the unconditional and conditional coverage tests of the back-testing analysis,and the banking sector remains the primary source of domestic systemic risk.Secondly,the economic policy uncertainty has a significant positive impact on systemic financial risk.Thirdly,economic policy uncertainty will further expand the impact on domestic systemic financial risks through investor sentiment.In the part of heterogeneity analysis,we find that monetary policy uncertainty is an essential factor for systemic financial risk in China.During the financial crisis,economic policy uncertainty has a more significant impact on systemic financial risk.Compared with the existing literature,the marginal contribution is mainly reflected in the following three aspects.Firstly,this paper enriches and improves the research content and framework of the impact of economic policy uncertainty on stock market co-movement and risk spillovers.In the existing literature,the main influencing factors mainly stay at the macroeconomic variables,industries,and institutions.Few literatures have explored the impact of economic policy uncertainty on stock market co-movement and risk spillovers from the perspective of national economic policy.Secondly,this paper not only proposes a new systemic risk measurement model,but also further proposes a back-testing analysis method to test the model,including unconditional coverage test and conditional coverage test.It is an effective method for existing systemic risk measurement research methods.Thirdly,from the perspective of investor sentiment,this paper deeply examines the transmission effect of economic policy uncertainty on stock market co-movement and risk spillover,breaking scope of research about how economic policy uncertainty affect stock market co-movement and risk spillover.This paper puts forward three policy suggestions.Firstly,to ensure the effective operation and stability of the domestic stock market,policy departments should improve the stability and transparency of economic policies and reduce the uncertainty of economic policies domestic stocks market impact.Secondly,since monetary policy is an essential factor affecting domestic stock market risks,regulators should use monetary tools cautiously,avoid excessive expansion or tightening of monetary policies,and reduce the impact of monetary policy uncertainty on the stock market.Thirdly,the government departments should continue to promote the system construction of my country’s stock market,increase investment in financial knowledge re-education for stock market investors,especially retail investors,and guide investors to establish a correct view of value investing.