Economic Policy Uncertainty and Stock Returns in China: The Role of Regulatory Short-selling Constraints
Year: 2025
Type: article
Abstract: We examine the association between economic policy uncertainty (EPU) and expected stock returns and how short-selling regulations in China moderate this relationship. Consistent with the overpricing effects literature, we find a negative EPU–return relationship before the introduction of margin trade and short-selling (MTSS) program in 2010. However, after implementation of MTSS, the relationship turned positive for stocks without short-selling constraints, reflecting investors’ demand for higher risk compensation. Using propensity score matching and difference-in-differences, we demonstrate that relaxation of short-selling constraints mitigates overpricing and generates positive uncertainty premium. Our findings highlight the importance of short selling in pricing of uncertainty and implications for policymakers and investors. JEL Codes: D53, D81, G11, G12
Authors: Binsheng Qian, Sunil Poshakwale
Institutions: Coventry University, Cranfield University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,650
OpenAlex ID: W7115066765