policy risk

  • 详情 Navigating Political Risks: The Role of Firm Political Alignment
    We examine the determinants and consequences of an important but understudied strategy in managing political risks—firm political alignment (FPA). Using a GPT large language model, we measure FPA as the extent to which firms align their actions and commitments with government agendas as presented in annual reports. Leveraging two political events in China, we find that: 1) as the anti-corruption campaign that started in 2012 and later spread across different provinces serves as a staggered shock that reduces the effectiveness of political ties, firms increase their FPA in response; 2) the extent of FPA largely mitigates the negative market reaction around the announcement of the common prosperity policy in 2021 which heightens policy uncertainty for non-state-owned firms. Overall, our findings provide novel evidence that firms engage in FPA to manage political risk.
  • 详情 The Diversification Benefits and Policy Risks of Accessing China's Stock Market
    China's stock market (the "A share market'') has a lower correlation with the global market and is less affected by international financial contagions than any other major economy. The inclusion of mainland China stocks into an international portfolio increases its Sharpe ratio. However, we find that Chinese stocks providing the most diversification benefits also carry the most policy risk for international investors. Holding Chinese stocks listed in Hong Kong does not reap the same diversification benefits. While global market integration and the increase in foreign ownership can diminish diversification benefits, mainland China stocks still provide valuable diversification opportunities for international investors up till the most recent time in late 2010s.
  • 详情 The Pricing of Policy Instability in Interest Rates: The China Experience
    Our study is the first to examine the effect of policy instability on interest rates. China offers a natural setting for the experiment because financial market liberalization policy flip-flops recur. When a policy is reversed, interest rate level and spread can increase or decrease in the interbank repo market. Accounting for the bureaucratic quality of policymaking, we find that the nonpredictable, non-credible and non-timely reversal of an existing policy is related to higher interest rate spread and volatility, which represent higher risk premia in interest rates. Conversely, predictable, credible and timely reversal is related to lower interest rate spread and volatility. Our results suggest that bureaucratic quality is a moderating factor and high bureaucratic quality can reduce the risk premia of policy instability being priced in interest rates.
  • 详情 The Effects of Policy Reversals: A Natural Experiment from Financial Market Liberalization in China
    What are the effects of policy reversals which were initiated by the US bureaucracy in response to the 2008 global financial crisis? Answering this question is challenging because US capital markets are relatively mature and policy reversals are far and in between in recent years. Specifically, the challenges include the one-time nature of these US policy reversals, the confounding effects of many programs targeting interrelated segments of the capital markets at the same time as well as possible endogeneity issues. China, on the other hand, offers a natural experiment to study the effects of policy reversals. In the last three decades, the Chinese government has initiated many policy changes to liberalize the capital markets and some of these have been reversed several times. Using hand-collected data of policy reversals targeting the Chinese stock markets from 1994 through 2009, we are able to address the first two challenges. To resolve any endogeneity issue, we focus on the impact of such policy reversals (targeted at the Chinese stock markets) on the Chinese repo markets, which trade market-driven interest rates. We find that the Chinese policy reversals are indeed effective in reducing the term spread, the volatility of the interest rate, and the volatility of the term spread. Our results suggest that the policy risk is systematically priced in financial securities, implying that policy makers can rely on financial market indicators to objectively evaluate their policy decisions.
  • 详情 The Effects of Policy Reversals: A Natural Experiment from Financial Market Liberalization in China
    What are the effects of policy reversals which were initiated by the US bureaucracy in response to the 2008 global financial crisis? Answering this question is challenging because US capital markets are relatively mature and policy reversals are far and in between in recent years. Specifically, the challenges include the one-time nature of these US policy reversals, the confounding effects of many programs targeting interrelated segments of the capital markets at the same time as well as possible endogeneity issues. China, on the other hand, offers a natural experiment to study the effects of policy reversals. In the last three decades, the Chinese government has initiated many policy changes to liberalize the capital markets and some of these have been reversed several times. Using hand-collected data of policy reversals targeting the Chinese stock markets from 1994 through 2009, we are able to address the first two challenges. To resolve any endogeneity issue, we focus on the impact of such policy reversals (targeted at the Chinese stock markets) on the Chinese repo markets, which trade market-driven interest rates. We find that the Chinese policy reversals are indeed effective in reducing the term spread, the volatility of the interest rate, and the volatility of the term spread. Our results suggest that the policy risk is systematically priced in financial securities, implying that policy makers can rely on financial market indicators to objectively evaluate their policy decisions.
  • 详情 The Effects of Policy Reversals: A Natural Experiment from Financial Market Liberalization in China
    What are the effects of policy reversals which were initiated by the US bureaucracy in response to the 2008 global financial crisis? Answering this question is challenging because US capital markets are relatively mature and policy reversals are far and in between in recent years. Specifically, the challenges include the one-time nature of these US policy reversals, the confounding effects of many programs targeting interrelated segments of the capital markets at the same time as well as possible endogeneity issues. China, on the other hand, offers a natural experiment to study the effects of policy reversals. In the last three decades, the Chinese government has initiated many policy changes to liberalize the capital markets and some of these have been reversed several times. Using hand-collected data of policy reversals targeting the Chinese stock markets from 1994 through 2009, we are able to address the first two challenges. To resolve any endogeneity issue, we focus on the impact of such policy reversals (targeted at the Chinese stock markets) on the Chinese repo markets, which trade market-driven interest rates. We find that the Chinese policy reversals are indeed effective in reducing the term spread, the volatility of the interest rate, and the volatility of the term spread. Our results suggest that the policy risk is systematically priced in financial securities, implying that policy makers can rely on financial market indicators to objectively evaluate their policy decisions.