The policy-driven feature of China’s stock market induces a debatable argument that political interference should be responsible for the sharp fluctuations of the stock markets because of discretionary changes in government policies. Furthermore, Chinese economy is currently undergoing significant restructuring and transition which need strong support from the capital market, and a stable and healthy stock market is believed to be a key part of the reform process. Therefore, the investigation of the relationship between the risk arisen from government policy and the volatility in the stock markets is of particular importance to both policy makers, investors and academics.

In this study, we first explore the policy-driven feature of China’s stock market.  Then, we develop policy risk index based on the frequency of news articles published in the 5 selected sample official newspapers to measure the policy risk and/or uncertainty in China‘s stock markets that are related to policy events such as government intervention, official comments, regulatory activities and market expectations or market rumors. Subsequently, to identify the impact of policy risk on the volatility of the stock markets, multivariate regression models including the PRI as an important explanatory variable are estimated in terms of the different Chinese market conditions.

This presentation will focus on exploring the policy-driven feature of China’s stock market.