Economic Policy Uncertainty and Investor Sentiment: An Empirical Investigation

Abstract

In the context of increasing economic volatility, our study delves into the impact of Economic Policy Uncertainty (EPU) exposure on investor sentiment in China’s A-share market. By utilizing firm-level data from 2014 to 2022, EPU exposure is estimated through the Fama-French Five-Factor model, enabling an implicit analysis of how macroeconomic uncertainty influences and reshapes the investor behavior. The analysis, based on the linear regression techniques and Two-Stage Least Squares (2SLS), identifies a vivid and significant negative correlation between EPU exposure and investor sentiment. Our findings underscore a destabilizing effect of policy fluctuations on the ongoing market perception and investors’ response to it. The results demonstrate strong robustness across multiple validation checks and reinforce their relevance for analyzing the investor responses in emerging markets amid uncertain policy conditions.