Does Economic Policy Uncertainty Affect Stock Return And Risk?

Economic Policy Uncertainty(EPU)refers to the various unpredictable factors included in future economic-related policy changes.In recent years,China's policy reforms,such as "four trillion stimulus","supply-side" structural reform,macro-prudential financial supervision system construction,state-enterprise mixed-system reform,debt-to-equity swap,and science-innovation exploration,have emerged,which makes the uncertainty of economic policy reach an unprecedented height.The existing literature suggests that the conditional time-varying volatility of macroeconomic policy shocks is related to real economic activity and asset returns.Therefore,economic policy uncertainty is a relevant state variable that affects future consumption and investment decisions,and it is also a key factor in generating stock risks.To this end,it is necessary to examine and clarify the mechanism and realistic effects of economic policy uncertainty affecting stock returns and risks.Inheriting existing research,this paper examines the risks of stock exposure to economic policy uncertainty and attempts to explore the role of economic policy uncertainty in the cross-sectional pricing of individual stocks and stock portfolios.The research has shown that monthly risk-adjusted returns on stocks with high sensitivity are significantly higher in the five-part combination,and that this uncertainty premium is driven by superior(poor)performance of high(low)sensitive stocks.The reason is that investors in Chinese market need additional compensation to hold low-sensitive stocks,and they are willing to pay high prices for highly sensitive stocks.Uncertainty indicators also show a certain "anti-V" pattern in stock cross-sectional returns,which may be caused by the fact that retail investors take a large part in Chinese stock market.In addition,we also find that the effects of economic policy uncertainty on stock volatility risk are significant even after controlling many traditional risk factors,corporate heterogeneity and external environmental changes.The risk of private enterprise stocks with lower equity yield and asset growth rate is more obvious due to the uncertainty of economic policy,and this effect is particularly prominent in the period of macroeconomic depression and economic policy instability.We expand and supplement the existing literature on risks and uncertainties,and provide a reasonable explanation for the economic policy uncertainty premium based on investor preference and market structure.