Abstract/Summary

This study develops a new economic uncertainty (EU) index based on Chinese newspapers to address the media coverage bias of existing measures. We investigate how EU affects China’s macroeconomy. Our results suggest that EU reduces aggregate output. We find that uncertainty predicts fluctuations in economic activity and actual economic activity also predicts EU, but nonlinearly. Furthermore, we show that uncertainty in the United States leads to uncertainty in China, implying that negative EU on the Chinese economy is coming from the U.S. Finally, we conduct some asset pricing tests, showing that EU can predict stock returns and commands risk premium. Our results are helpful for both researchers and policymakers to stabilize the economy and financial markets in China.