Policy uncertainty, investor sentiment, and good and bad volatilities in the stock market: Evidence from China

This paper investigates the impact of fiscal policy uncertainty (FPU), monetary policy uncertainty (MPU), trade policy uncertainty (TPU), and exchange rate and capital account policy uncertainty (ECPU) on the good and bad volatilities in the Chinese stock market. Considering the pronounced irrational behavior within the Chinese stock market, we also assess the role of investor sentiment in the relationship between these policy uncertainty measures and stock market volatilities. The empirical results show that FPU contributes positively to both good and bad volatilities, MPU and ECPU positively affect bad volatility, whereas TPU has an insignificant effect on any volatilities. Further asymmetric and lagged effects analysis indicates that the impact of FPU, MPU, and ECPU has no asymmetries, with only FPU and MPU displaying lagged effects. Finally, we find that investor sentiment mainly mitigates the positive impact of ECPU on bad volatility.