Journal article
Geopolitical risk, economic policy uncertainty and asset returns in Chinese financial markets
China finance review international, v 11(4), pp 474-501
20 Oct 2021
Featured in Collection : UN Sustainable Development Goals @ Drexel
Abstract
Purpose: This paper investigates the impact of a change in economic policy uncertainty (Delta EPUt) and the absolute value of a change in geopolitical risk (vertical bar Delta GPR(t)vertical bar) on the returns of stocks, bonds and gold in the Chinese market.
Design/methodology/approach: The paper uses Engle's (2009) dynamic conditional correlation (DCC) model and Chiang's (1988) rolling correlation model to generate correlations of asset returns over time and analyzes their responses to (Delta EPUt) and vertical bar Delta GPR(t)vertical bar.
Findings: Evidence shows that stock-bond return correlations are negatively correlated to Delta EPUt, whereas stock-gold return correlations are positively related to the vertical bar Delta GPR(t)|, but negatively correlated with Delta EPUt. This study finds evidence that stock returns are adversely related to the risk/uncertainty measured by downside risk, Delta EPUt and vertical bar Delta GPR(t)vertical bar, whereas the bond return is positively related to a rise in Delta EPUt; the gold return is positively correlated with a heightened vertical bar Delta GPR(t)vertical bar.
Research limitations/implications: The findings are based entirely on the data for China's asset markets; further research may expand this analysis to other emerging markets, depending on the availability of GPR indices.
Practical implications: Evidence suggests that the performance of the Chinese market differs from advanced markets. This study shows that gold is a safe haven and can be viewed as an asset to hedge against policy uncertainty and geopolitical risk in Chinese financial markets.
Social implications: This study identify the special role for the gold prices in response to the economic policy uncertainty and the geopolitical risk. Evidence shows that stock and bond return correlation is negatively related to the Delta EPU and support the flight-to-quality hypothesis. However, the stock-gold return correlation is positively related to vertical bar Delta GPR vertical bar, resulting from the income or wealth effect.
Originality/value: The presence of a dynamic correlations between stock-bond and stock-gold relations in response to Delta EPUt and vertical bar Delta GPR(t)vertical bar has not previously been tested in the literature. Moreover, this study finds evidence that bond-gold correlations are negatively correlated to both Delta EPUt and vertical bar Delta GPR(t)vertical bar.
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Details
- Title
- Geopolitical risk, economic policy uncertainty and asset returns in Chinese financial markets
- Creators
- Thomas C. Chiang - Drexel University
- Publication Details
- China finance review international, v 11(4), pp 474-501
- Publisher
- Emerald Group Publishing
- Number of pages
- 28
- Grant note
- Austin Chair fund from LeBow College of Business, Drexel University
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- [Retired Faculty]
- Web of Science ID
- WOS:000630094800001
- Scopus ID
- 2-s2.0-85102598516
- Other Identifier
- 991019167321104721
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InCites Highlights
Data related to this publication, from InCites Benchmarking & Analytics tool:
- Web of Science research areas
- Business, Finance