# Time-varing effect of policy uncertainty on A-share industry returns— A novel Bayesian approach

## TL;DR

This paper introduces a new Bayesian method to study how policy uncertainty affects A-share industry returns over time, considering industry interconnections.

## Contribution

A novel Bayesian approach is introduced to model time-varying policy uncertainty effects with industry input-output networks.

## Key findings

- Network spillover effects explain about 39% of A-share industry returns' response to policy uncertainty.
- Economic and fiscal policy uncertainties show positive network effects, while exchange rate and trade uncertainties show negative effects.
- Systemic risk is highest in fiscal and trade policy uncertainty groups, except trade which shows a declining trend.

## Abstract

The impact of policy uncertainty on A-share industry returns shows significant time-varying characteristics, amplified by industry input-output relationships. Traditional TVP-VAR models overlook network structures, leading to unquantified spillover effects and imprecise systemic risk identification. To address this problem, this study embeds industry input-output tables as matrices into Time-Varying Parameter Spatial Autoregressive Model, and Bayesian methods are innovatively introduced into this model to capture the parameters. Policy uncertainty is categorized into five dimensions—economic, fiscal, monetary, exchange rate, and trade. Empirical results reveal following key findings: On average, network spillover effects explain approximately 39% of the response of A-share industry returns to policy uncertainty. Group analysis reveal that economic and fiscal policy uncertainties exhibit positive network effects, indicating synergistic effect that amplify their impact across industries. In contrast, exchange rate and trade policy uncertainties generate negative network effects, reflecting competitive or substitution effects. Systemic risk is most pronounced in fiscal and trade policy uncertainty groups. Systemic risk increases across all policy uncertainty groups except trade, which shows a declining trend. This study provides a novel framework for understanding the dual nature of spillover effect in production networks, offering valuable insights for policymakers and investors to manage systemic risks and indentify synergistic and competitive effects in interconnected industries.