Abstract
The primary objective of this study is to examine the differential impact of policy uncertainty on idiosyncratic volatility in the Chinese stock market. China has the second-largest GDP in the world but is still classified as an emerging market, which means it is more susceptible to idio-syncratic market volatility. In all countries, markets are influenced by policy uncertainty at the federal level. However, because China's risk averse approach to the stock market is less laissez-faire than average, the effects of policy uncertainties, including monetary, fiscal, and trade policy , may be magnified in Chinese markets, which is the focus of this study. Our empirical findings indicate that Monetary Policy Uncertainty (MPU), Fiscal Policy Uncertainty (FPU), and Trade Policy Uncertainty (TPU) are positively linked to idiosyncratic volatility. Employing the Elastic Net method, we find that MPU has a greater ability to predict idiosyncratic volatility than FPU and TPU. To investigate the interconnectedness of Chinese industries, we construct a spillover index and find that policy uncertainty has the largest impact on the manufacturing industry. Our analysis reveals detailed information about how each industry responds to policy uncertainty, emphasizing the important role of policymakers and highlighting the market inefficiencies of government intervention.