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Study of the Transmission Mechanism of Asset Price Volatility in the Real Economy

Author: ChangLong
Tutor: ZhaoChunLing
School: Nanjing University of Finance and Economics
Course: Western Economics
Keywords: Asset Price the Real Economy Wealth Effect Investment Effect
CLC: F832.5
Type: Master's thesis
Year: 2013
Downloads: 1
Quote: 0
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Abstract


In recent years, the asset price fluctuated heavily in China. When Only focusedon shanghai composite index, the stock price was up to6124.04points on October16,2007, from998.23points on June6,2005previously. When the subprime crisishappened, the stock price dropped sharply subsequently and fell to1664.93points onOctober28,2008. Now the stock price hovered around2300points. Compared withthe stock market of the developed countries, our stock market movements hasdeviated the real economy since2008significantly. After the subprime crisis, thestock price crashed to the earth and never recovered, while the real economy hasmaintained the steady growth, resulting in the weak correlation of the stock price withthe real economy and also challenging the efficiency and the "barometer" function ofthe stock market, so the macro mechanism of stock market affecting the real economyis worth studying. In addition, the stock market has the micro mechanism of affectingthe real economy, that’s the wealth effect and investment effect. Asset price can affectthe household consumption via the wealth effect and affect the investment of theenterprise. The newly developed consumer theories suggest that the financial assetowned by the households can affect the consumption of households and theinvestment theories suggest that the financing capacity of companies in the stockmarket will affect their investment decisions in the real economy. Examining theexistence of the micro mechanism in our stock market, on one hand, we can verify theconsumer theories and the investment theories, and on the other hand, can testwhether stimulate the consumption, investment and the economic growth bypromoting the rational development of the stock market. All of these has the practicalsignificance.This article is intended to examine the transmission mechanism of stock pricesaffecting the real economy, through comparative analysis, correlation analysis ofpanel data models, VAR models, methods, and conclusions are:1. The securitizationratio of China’s stock market is relatively small, compared to the trend of the stockmarket and the real economy in the developed countries, there is no coordination ofthe stock market and the real economy in our country;2. There is the long-runequilibrium relationship between the shanghai composite index and the factors of thereal economy. Even though the stock price deviates the real economy regularly, the stock price has the consistency of the macro mechanism with the real economy.3. Thefactors of the real economy has the strong interpretation of the shanghai compositeindex, while the shanghai composite index has the weak interpretation of the realeconomy. The "barometer" function of the stock market is not existed.4. Stockmarket has the negative wealth effect, the empirical analysis of classified sampleshows that the reform of non-tradable shares of the stock market can promote thewealth effect, the eastern part of our country has the negative inapparent wealth effect,the central region has the inapparent wealth effect, and the western region has thesignificant negative wealth effect.5. Stock market has the weak investment effect, theempirical analysis of classified sample also shows that the reform of non-tradableshares of the stock market can promote the investment effect, the eastern, central andwestern regions of China all have the positive investment effect.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial market
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