Economic Policy Uncertainty and Stock Liquidity

Abstract

Based on the annual stock data of Chinese stock market from 2007 to 2019, this paper explores how economic policy uncertainty (EPU) affects stocks’ liquidity by applying a fixed effect model (here the effects of different years and different stocks are controlled). It has analyzed what role the retail investor attention plays in the interplay between EPU and stocks’ liquidity. The results show that the increase of EPU makes retail investors more willing to trade stocks, thus increasing the liquidity of stocks. Furthermore, this paper categorizes listed companies into 4 different groups according to their market value and return on assets (ROA). And it has been found that the interplay among EPU, China investors’ composite sentiment index (CICSI), and Amihud is more notable in companies with small market value and high ROA.