Economic Policy Uncertainty,Investor Sentiment And Financial Stability

Since the beginning of the 21^st century,the global economy has experienced various challenges.Especially after the U.S.subprime crisis which has triggered the global financial crisis,the growth momentum of the global economy has weakened,and the economic policy uncertainty in various countries has increased.As the second largest economy in the world,both challenges and opportunities exist in the current economic situation in China.It is significant to adjust the economic policies to promote the high-quality economic development.Also,the changes of the macroeconomic policy are closely related to the financial sector.Although the financial market of China has achieved considerable achievements,it also confronts with many problems.The benign interaction between the economy and finance is also correlated with the investors'expectation of the future market.Therefore,it is important to explore the dynamic linkage between economic policy uncertainty,investor sentiment and financial stability,which can promote the high-quality development of China's economy,improve the investor sentiment and the financial stability.Firstly,this paper uses the entropy weight-analytic hierarchy process to overcome the defects of subjective and objective weighting in constructing composite index,in order to measure the stability of the financial system.Secondly,this paper applies the VAR model to explore the relationship among economic policy uncertainty,investor sentiment and financial stability,as well as the interaction mechanism through employing the impulse response and variance decomposition.Moreover,the related tests reveal that the interrelationship among economic policy uncertainty,investor sentiment and financial stability is time-varying.Finally,this paper performs the TVP-VAR model to investigate the dynamic relationship between these three variables at different ahead periods and time points.Also,based on the TVP-VAR model,the mediating effect of investor sentiment can be obtained.The empirical results show that,for the perspective of the different ahead periods,economic policy uncertainty has an obvious negative impact on investor sentiment and financial stability in the short term.The influence from economic policy uncertainty to investor sentiment is higher than financial stability.These influences are more significant during the period of the global financial crisis in 2008.Investor sentiment also has a significant negative impact on economic policy uncertainty.However,investor sentiment has a positive effect on financial stability before 2010.Then,there is a negative influence of investor sentiment on financial stability after 2010,and the greatest negative impact can be observed during the period of the stock market crash in 2015.Furthermore,economic policy uncertainty is also negatively affected by financial stability,and the effect of financial stability on investor sentiment is positive excepts for the period of2008-2011.For the perspective of the different time points,the interaction mechanism among these three variables is similar in response to different economic events,but there are also several differences.For the perspective of mediating effect,economic policy uncertainty has an indirect impact on the stability of the financial system through investor sentiment,and vice versa.