Economic Policy Uncertainty,Investor Sentiment And Stock Prices

As an emerging capital market,China's stock market is still not mature.In order to maintain the stability of the stock market,the government will often take administrative measures or economic policies to intervene in the stock market.Changes in government policies will affect the direction of the stock market.When the policy has not yet been introduced,investors do not know whether the government and the policies adopted to intervene in the stock market.Because of this policy uncertainty,investors will have different expectations for the stock market.At the same time,retail investors in China's stock market account for a large proportion.The basic knowledge of the capital market owned by retail investors and the research on the stock market are not as serious as the “herd effect” of institutional investors,and their trading behavior is more likely to be emotionally driven.Therefore,it is of great practical significance to study how economic policy uncertainty will affect investor sentiment and how this effect will affect the stock market.This paper uses Baker's economic policy uncertainty index to measure the degree of policy uncertainty in China.At the same time,with reference to Yi Zhigao's(2009)method,the principal component analysis method is used to construct the investor sentiment index of China's stock market.This paper chooses the Shanghai Composite Index as a proxy variable for stock prices.This paper uses the TVP-SV-VAR model to analyze the time-varying impacts between economic policy uncertainty,investor sentiment,and stock prices.The impulse response results between the variables are calculated based on the time-varying parameters estimated by the TVP-SV-VAR.At the same time,the point impulse response result and the lead time impulse response result are plotted.According to the analysis of empirical results,the paper draws the following conclusions: First,the uncertainty of economic policy will have a negative impact on investor sentiment and the stock market.When subjected to the impact of uncertainty,the expected risk of microeconomic entities becomes greater.The change in investor expectations brought about by policy uncertainty will not only significantly affect the ups and downs of stock prices,but also may lead to dramatic changes in investor sentiment and increase the likelihood of investors' irrational behavior.Second,the impact of investor sentiment on stock prices has a reversal effect in the short-term and long-term.When investor sentiment becomes higher,it will raise the stock price in the short term,but over time,the stock premium caused by emotional factors in the early stage will lead to the stock price decline in the later stage,which will have a negative impact on the stock price in the long run.At the same time,the impact of investor sentiment on stock prices also has obvious time-varying effects.When China's stock market is in a bull market,the impact of investor sentiment on the stock price is significantly greater than other periods.Third,the rise in stock prices will raise investor sentiment in the lag period.From a time-varying point of view,when the stock market is in a bull market,the impact of stock price changes on investor sentiment is more significant.Fourth,there are similarities in the response of different types of stocks when they are affected by uncertainty and investor sentiment.Consumer stocks are most affected by uncertainty and investor sentiment.According to the research results of this paper,in order to stabilize investor sentiment and promote the stable and healthy development of the stock market,this paper puts forward corresponding policy recommendations: First,reduce policy uncertainty as much as possible.When analyzing and formulating economic-related policies,China should reduce policy uncertainty as much as possible,thereby reducing the negative impact of policy uncertainty on the market and investors.The second is to strengthen investor education and advocate rational investment concepts.Third,listed companies should further improve their dividend system,thereby reducing investors' short-term irrational speculation.In addition,adjusting the capital structure of the stock market is also conducive to guiding investors to switch to long-term investment,further alleviating the short-term large changes in the stock market caused by policy shocks,and improving the long-term spillover effects of policy changes on the stock market.