Effect of Economic Policy Uncertainty on China’s Stock Price Index: A Comprehensive Analysis Using Wavelet Coherence Approach

Abstract

Amid China’s dynamic economic backdrop, Economic Policy Uncertainty (EPU) and stock market indices hold pivotal roles, this research delves into EPU and its connection with the stock price index (SPI). By uncovering patterns linking these variables, the study aims to provide a nuanced understanding of their relationship. We employ wavelet coherence analysis and a phase difference approach to investigate EPU impact on China’s SPI from 2010 to 2020. Through this lens, the interactions between these economic variables are illuminated. Using wavelet coherence analysis, the temporal dynamics of EPU and SPI are explored. The phase difference approach further highlights the temporal alignment of fluctuations, capturing the intricate relationship. The analysis reveals compelling findings. A robust correlation between EPU and the SPI emerges, particularly at low frequencies, underscoring a substantive connection. The phase difference analysis indicates a positive influence of EPU on stock prices, highlighting its impact on SPI. Besides, implications imply EPU shapes stock market behavior, moving beyond mere correlation. A causal link is established, emphasizing EPU’s proactive role in influencing stock prices. Bidirectional causation underscores the interdependence of EPU and stock price movements. This research enhances understanding of EPU’s effects on stock prices in China. Finally, this study provides important implications for investors, policymakers, and businesses, guiding strategic decisions amid a dynamic economic landscape.