Stock Market Uncertainty and Economic Fundamentals: An Entropy-Based Approach
by Kwangwon Ahn, Daeyong Lee, Sungbin Sohn, Biao Yang
ARTICLE | Quantitative Finance | Forthcoming
Abstract
This study investigates the effects of stock market uncertainty on economic fundamentals, represented by economic activities and systemic risk, in China. To capture the uncertainty in the Chinese stock market precisely, we use the entropy measure through symbolic time-series analysis. The empirical findings reveal strong spillover effects from stock market uncertainty to economic fundamentals. Specifically, an uncertainty shock generates (i) a short-term decline in industrial production, (ii) a rapid drop and rebound in the composite leading indicator, and (iii) an increase in systemic risk. To understand these findings, we suggest and validate the transmission channel through changes in consumption and investment.
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