Pricing Chinese Equity Uncertainty Exposure with the EPU Beta Factor

Summary

The report asks whether exposure to macroeconomic policy uncertainty is priced in Chinese A-shares. It describes a news-based economic policy uncertainty index and estimates each stock’s EPU beta through time-series regression. Stocks are sorted into five groups by beta, and their subsequent returns are compared using equal-weighted and market-cap-weighted portfolios. The report also tests whether common equity factors explain the return spread and examines results within market-cap groups.

Higher-EPU-beta stocks had higher average returns, with a positive spread that remained after controls for factors such as size, reversal, and return on equity. The relation appeared strongest among large-cap stocks, while other size groups showed weaker results. The report also describes improved long-short performance statistics after adding EPU beta to a Shanghai-Shenzhen 300 factor model. Its findings are exposed to market, liquidity, and model-failure risks, and the conclusions may be sensitive to the sample and portfolio design.

Key ideas

• The study measures stock exposure to Chinese economic policy uncertainty with a regression-based EPU beta.
• Sorting A-shares by EPU beta produced a rising pattern in average returns.
• The return relationship persisted after controls for several common stock-selection factors.
• The pattern was clearest among large-cap stocks and weaker in other size groups.
• The reported results may be affected by market, liquidity, and model-failure risks.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.