Economic Uncertainty,Stock Return,and Bond Return

Using the Economic Uncertainty Index based on China’s macroeconomic data and the overall stock market data constructed by Huang et al.(2018),this paper explores the relationship between macroeconomic uncertainty and asset returns,including stock returns and bond returns.I first use spectral analysis method to study the correlation between economic uncertainty and asset returns at in different frequencies.Then I use VAR model is used to investigate the dynamic relationship between economic uncertainty,stock returns and bond returns.This paper finds the following.First,both stock returns and economic uncertainty have important variation in the semi-annual and quarterly cycles.The fluctuation of economic uncertainty lags behind that of stock market and bond market.Secondly,stock returns and bond returns are significant predictors of economic uncertainty,which implies that asset prices reflect investors’ expectations of future economic uncertainty.The positive response of stock prices to the increase of expected macroeconomic uncertainty is more significant during the market downturn,which may indicate that the impact of uncertainty expectation on price is asymmetric.Lastly,the dynamic relationship between economic uncertainty and asset return changed after 2008.Economic uncertainty has a significant predictive effect on stock return before 2008,while after 2008,stock return and bond return help to predict economic uncertainty.