Abstract
We find that Chinese EPU shocks can explain 40% of the cross-sectional variation in bond returns. We also find that Chinese EPU shocks command a significant negative risk premia. In contrast to a strong explanatory power for bond markets, we do not find meaningful pricing power of Chinese EPU for equity markets. We argue and provide supporting empirical evidence that this result is attributable to the fact that Chinese EPU has a strong influence on the U.S. economy mainly during recessions. Overall, our findings suggest that a foreign EPU shock could be a potentially important factor in explaining bond returns.
Original language | English |
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Pages (from-to) | 1063-1077 |
Number of pages | 15 |
Journal | International Review of Economics and Finance |
Volume | 76 |
DOIs | |
State | Published - Nov 2021 |
Keywords
- Chinese economic policy uncertainty
- Cross-section of bond returns
- Global economy
- ICAPM
- VIX