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The Research on Return Co-movement of China’s Stock and Bond Markets

Author: SunQianDai
Tutor: AiHongDe
School: Dongbei University of Finance
Course: Finance
Keywords: Stock Bond Return Comovement Vector autoregression
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Type: Master's thesis
Year: 2013
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Abstract


Capital market is the place for allocating social resources. Mature and efficient capital market is very important for the development of economy. Stock market and bond market is the most important components of the capital market. The Research on Return Co-movement of Stock and Bond Markets has a practical significance for micro-investors to make investing decisions and for macro-smooth operation of capital markets.The Research on Return Co-movement of Stock and Bond Markets is from the perspective of this the yield of capital to explore whether the existence of the relationship between stock market and bond market yields really exist and the form of the relationship. The research also includes the impact of macroeconomic factors to the relationship and appropriate policy recommendations.First we make theoretical analysis about the mechanism of the Co-movement of stock market and bond market and the impact of macroeconomic factors to the Co-movement of Stock and Bond Markets. The macroeconomic factors include monetary factors, price factors and economic factors. We use interest rate and money supply to represent monetary factors, inflation and exchange rate to represent price factors, fixed assets investment and consumption to represent economic factors.According to the theoretical analysis stock market and bond market interact with each other mainly through three kinds of mechanisms:stocks and bonds portfolio allocation; commercial bank balance sheet structure; real economic cyclical operation. Interest rates, money supply and exchange rate will lead yields of the stock market and bond market to move in the same direction. The effect of Inflation is uncertain. Fixed asset investment and consumption will lead yields of the stock market and bond market to move in the opposite direction.Empirical analysis is divided into two parts:the existence of relationship of stock market and bond market; the impact of macroeconomic factors to the relationship of stock market and bond market. The empirical method of the first part is to establish vector auto-regression model and then make impulse response function, variance decomposition and Granger causality analysis. The empirical method of the second part is to use cointegration and vector error correction model.According to the empirical analysis the stock market and the bond market does have impact on each other. But influence to each other is weak. We also find that the stock market has stronger impact on the bond market than the impact of the bond market on the stock market. The relationship between stock market and bond market is impacted by interest rate, money supply, exchange rate, inflation, fixed asset investment and consumption. Interest rate has a negative correlation with the yields of stock and bond market. Money supply has a positive correlation with the yields of stock and bond market. Inflation has a negative correlation with the yields of stock and bond market. Exchange rate has a negative correlation with the yields of stock and bond market. Fixed asset investment has a negative correlation with the yields of stock and bond market. Consumption has a positive correlation with the yields of stock and bond market. The empirical impact of macroeconomic factors to the relationship of stock market and bond market is almost consistent with the theoretical analysis. We also find out that the impact of macroeconomic factors on stock market is greater than the bond market.According to the theoretical analysis and empirical analysis we get the conclusions:stock market and bond market have mutual influence but the influence is not balanced; the stock market and bond market are divided states; the macro economic factors affect relationship between stock market and bond market; the impact of macroeconomic factors on the stock market is greater than the bond market.Based on the theoretical and empirical analysis, some policy suggestions regarding to the future development of China’s security market are raised at last.

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