The Contagion Of Chinese Economic Policy Uncertainty (EPU): Evidence From Southeast Asian Stock Markets

The standard macroeconomic theory advocates that surge in uncertainty can lead to a temporary collapse of economic activity and hence the stock markets.Given the fact that uncertainty cannot be directly observed,the main aim of researchers and economists was to measure this situation in order to have an empirical tool of describing the level of uncertainty that an economy,industry or stock market is facing.The extant literature has presented numerous measures to compute uncertainty,which can be categorized into different groups.However,the EPU index built by S.R.Baker,Bloom,and Davis(2016)is the most influential measurement of uncertainty,which could be used as a measure of uncertainty linked to fiscal,monetary and other relevant policies.Many studies have used EPU as a proxy to measure uncertainty in economic policy,such as(Arouri,Estay,Rault,& Roubaud,2016;Brogaard & Detzel,2015;Dakhlaoui & Aloui,2016).Such researches generally believe that EPU substantially influences the financial markets,especially for European and American stock markets.Thus,this thesis selects the Chinese EPU index built by S.R.Baker et al.(2016)for research.This thesis contributed to the extant literature of policy uncertainty and financial markets by conducting three studies to empirically inspect the association of Chinese economic policy uncertainty(CHI-EPU)and the stock market fluctuations of Southeast Asian economies.In this context,this thesis is aimed to find answers on the given issues:(1)Does EPU in China has any role in explaining the disparities in AH stock premium returns?.(2)Does EPU in China has any effect on the asset price returns and/or volatility of ASEAN5‘ stock markets?.And finally,the reverse channel is investigated,that is,(3)whether volatilities in stock indices of ASEAN5 and AH premium have any role in forecasting Chinese EPU.The key findings from each study of the thesis could be summarized as follows:The first empirical study focuses on the investigation to empirically quantify the implications of Chinese EPU on AH-shares premium returns(Cross-Listed Shares Market).To more robustly test the change in AH premiums after the ?SH-HK Stock Connect? is launched;the study evaluates the impact of Chinese EPU,using non-parametric kernel density estimation.The empirical results show that parameter uncertainty explains variations in price disparity and can significantly reduce the returns of the AH share premium index(Chapter 4).The second empirical study analyzed the entire distribution of asset price returns and/or volatility of five emerging markets(ASEAN5)and figure out the conditional distribution of the CHI_EPU index by applying non-parametric conditional density estimation during the sample period of March 2011 to June 2018.This method offers a pliable pathway that allows getting the specific estimations at different intervals of the explanatory variable(i.e.CHI_EPU).The results indicate that Chinese EPU significantly explains the stock market returns and it leads to reduce stock returns and augment the volatilities of ASEAN5 stock markets,except for Malaysia.Thus,the risk of simultaneous investment in Chinese and ASEAN5 stock markets is higher for agents and participants of the market.Further,the degree of this influence intensifies at the extreme high and extreme low intervals(positive and negative tails)(Chapter 5).The third empirical study focuses on the reverse channel that is to examine whether the stock market volatilities can help in forecasting the EPU.For this purpose,the study chooses to forecast Chinese EPU based on asset market volatilities of its neighboring major trade partners(ASEAN5)and AH premium of Greater China.The study forecasted movements in Chinese EPU for the first time,based on financial uncertainty(measured by a realized volatility)of the selected East Asian Economies(EAEs)including ASEAN5 and Greater China(AH premium of China-Hong Kong),having close trade linkages with China,by using LR and DT methods.After controlling for macroeconomic variables,it is obvious from the findings of both methods that realized volatility of regional EAEs significantly forecasts the EPU of China,except for Thailand.Moreover,comparing the performances of both models based on the accuracy classification score test,LR performs better than DT(Chapter 6).The findings of all studies in this dissertation could provide significant inferences on asset pricing,government policymaking in the stock markets of emerging markets,valuable information and implications for investment and the management of risk in the financial markets to the forecasters,market agents,policymakers,and to the analysts among others.