Economic Policy Uncertainty, Investor Sentiment And Market Yields

The complex international situation and the economic structure in need of transformation continue to increase policy uncertainty,internal policy uncertainty is already enough to affect financial markets,external policy uncertainty is exacerbating the market volatility.The intensification of economic policy uncertainty will affect the behavior and psychology of economic subjects,and affect investors’ judgment of future asset returns and risks.The development of China’s financial market system is still in the groping stage of continuous development.At the same time,individual investors occupy the main part of China’s stock market,easy to produce herd effect.Therefore,it is of practical significance to study the impact of economic policy uncertainty on stock market returns from the perspective of investor sentiment.This paper discusses the impact of uncertainty on stock market returns from the perspective of behavioral finance.Firstly,through the analysis of the financial market,the trading volume,turnover rate,fund discount rate,consumer confidence index,the number of newly opened accounts are selected as the mood proxy indicators,using the monthly data from January 2003 to February 2021,using BW method to construct the investor sentiment index.Secondly,we use step-to-step test regression coefficient method to test the mediating effect of investor sentiment on the impact of uncertainty on stock market return and find that investor sentiment has a significant mediating effect.Finally for the analysis of uncertainty and the specific impact process between stock market returns,build three TVP-VAR model,respectively to study the direct effect,indirect impact of uncertainty on stock market returns under the influence of process and the closed-loop circulation between investor sentiment and returns to strengthen effect,in the short,medium and long term time variable characteristics respectively.Bear market,bull market and major events are selected to analyze the impact of uncertainty on stock market returns in different market states.The specific conclusions are as follows: 1.Economic policy uncertainty has a certain negative impact on the stock market return rate,and the increase of uncertainty will reduce the stock market return rate.Bear markets are strongest,followed by major shocks,and bull markets are weakest.Second,uncertainty may not have all negative effects on investor sentiment and has a certain time lag,depending on the positive and negative effects of policies on the economy.The influence degree of bull market is small and the influence direction is constantly changing,while the impact degree of bear market and major events is large and positive.Third,investor sentiment has a positive impact on the return rate of stock market,but the lifting effect of sentiment gradually weakens over time.It has the greatest effect on the market return in the bull market,followed by the bear market,and the least effect on the stock market return in the shock event.Investor sentiment only has an effect on the market return in the current period.Through the influence of investor sentiment on stock market returns,we can analyze two different market environments: bull market and bear market.Investor sentiment has a positive impact on the stock market yield.In a bear market,uncertainty is positively correlated with investor sentiment,so investor sentiment plays a positive pass-through role between the two,that is,uncertainty will increase the market yield.In a bull market,there is a negative correlation between uncertainty and investor sentiment,so investor sentiment plays a negative pass-through role between the two,that is,uncertainty will reduce the market yield.Fifth,investor sentiment has a positive effect on stock market returns.The investment ability and investment willingness of stock market participants will directly affect the change of stock market returns,and stock market returns will further stimulate investment enthusiasm,forming a closed-loop motion-return mechanism that circulates and strengthens each other.