Does monetary policy uncertainty command a risk premium in the Chinese stock market?

Abstract

We examine the pricing implications of monetary policy uncertainty (MPU) in the cross-section of stock returns in the Chinese stock market. Our results show that the long-short portfolio that is long stocks with the lowest exposures to innovations in MPU and short stocks with the highest exposures to innovations in MPU earns about 6% annualized alpha. The coskewness, idiosyncratic volatility, size, and book-to-market effects cannot account for the low (high) average returns earned by stocks with high (low) exposures to innovations in MPU. Furthermore, the exposure to innovations in MPU commands a significantly negative risk premium in the Fama-MacBeth regressions. These results indicate that investors have preferences for the early resolution of MPU.