Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
This study investigates the impacts of the economic policy uncertainty (EPU) indexes of China and the G7 countries on Chinese stock market volatility and further constructs a new diffusion index based on these indexes using principal component analysis (PCA) to achieve enhanced predictive ability. The in-sample results indicate that the EPU indexes of China and some of the G7 countries show a significantly negative impact on future volatility. Moreover, our constructed diffusion index also has a significantly negative impact. Furthermore, the out-of-sample results show that this diffusion index exhibits a significantly higher forecast accuracy than the EPU itself and combination forecasts. Finally, various robustness checks are consistent with our main conclusions. Overall, we construct a new and useful indicator that can substantially increase forecast accuracy with respect to the Chinese stock market.