An Empirical Study Of Monetary Policy Uncertainty,Investor Sentiment And Stock Market Returns

Alterations in economic policy cause the change of macroeconomic situation which can be seen in the stock market directly or indirectly.Notably,monetary policy as an important part of macroeconomic policy,its changes affect investor sentiment and further stock market returns.There are large number of minority investors in China who are sensitive to uncertainty in stock market,which increases the possibility of irrational investment behavior,causing abnormal fluctuations of stock prices and affecting stock returns.Therefore,there is a close relationship between monetary policy changes,investor sentiment and stock returns.This paper investigates the influence mechanism of the economic policy uncertainty on stock returns,represented by monetary policy.Monetary policy uncertainty,investor sentiment,and stock returns are put into a time-varying parametric vector autoregressive model to study the dynamic relationship among them,examining the intensity of the shocks’ impact between the variables and the variability of the shocks’ duration.After clarifying the time-varying relationship between the two variables,the impact process of the monetary policy uncertainty on stock market returns is investigated,based on the investor sentiment as an intermediate variable and the arguments in Section 3 that the impact of monetary policy uncertainty on investor sentiment and stock market returns.Regarding the selection of each variable proxy,the monetary dimension EPU index is used to represent the monetary policy uncertainty index,while the investor sentiment index is expressed by constructing index as a proxy,the stock market return is shown by the SSE 50 index with the sample interval of monthly data from 2004 to 2022.Finally,the conclusions are as follows: Firstly,monetary policy uncertainty has a negative impact on the return of SSE 50 index.Secondly,monetary policy uncertainty has a negative impact on investor sentiment,and this impact is most pronounced in the short term.Thirdly,investor sentiment has a positive correlation impact with the return of SSE 50 index returns,and the impact of investor sentiment on stock market return volatility is positive in the short term.Forthly,sentiment serves as a mediator in the impact process of the monetary policy uncertainty on the return of SSE50 index.