This study investigates whether China’s stock market is affected by government policy.  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. 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 and investors.

There are two parts to this research.  Part one develops a policy-related volatility index based on the frequency of news articles published in the 5 selected sample official newspapers to measure the volatility 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.  Part two empirically identifies the impact of government policy on the volatility of the stock markets using regression analyses with the policy-related volatility index being the key explanatory variable.  Results suggest that government policy has significant effects on the volatility of China’s stock market.  This is true for the entire sample period, as well as for the sub-samples of both bull markets and bear markets.

This presentation focuses on the empirical analyses of the effects of government policy on China’s stock market volatility.