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Cointegration econometric analysis of the macroeconomic impact of the stock market gains

Author: ZhaoXia
Tutor: HuZuo
School: Capital University of Economics
Course: Number of economic
Keywords: macroeconomic variables stock market cointegration analysis efficiency
CLC: F224
Type: Master's thesis
Year: 2005
Downloads: 828
Quote: 3
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Abstract

In this paper we analyze relationships among selected macroeconomic variables and Chinese stock market basing on the classical financial researching frame, by employing a cointegration Analysis model, try to offer a meaningful grope for the macroscopic affection on the stock market.The correlation between macro-economy and the stock market has been a mystery for years. Since the construction of the Representative Agent Model, the Equity Premium Puzzle has not been solved theoretically. To explain this puzzle many financial researchers add the macroeconomic factors to the capital asset pricing models to calculate the influence of macro variables on the stock assets. The results are affluent However, the Efficient Market Hypothesis of the capital asset pricing models are too strong in practice, which creates a new puzzle on the application of the correlation between macro-economy and the stock market to the empirical work. As an emerging market with the evident characters of a transition period, the China capital market is weakly efficient and the influence of the macro variables is also limited. Along with the incremental proportion of the institutional investors, the accelerated progress of the marketing reform and the strengthening efficiency of the capital market, the researching work on the puzzle of the correlation between the macro variables and the Chinese stock market has become more and more instructive. In fact, according to this paper, the cointegrated analysis of the correlation between the macro variables and the stock market derives the conclusion that the influence of the macro variables to the stock market is limited and unstable. However, the intensive analysis of the correlations between the macro variables and the micro performance of the industries and companies derived many conclusions consistent with the economic theories. With these two analyses together, the paper constructed an empirical frame for the current study as well as for the further grope on this puzzle. Besides the traditional research on the direct correlation between macro variables and stock market, the paper separated the transmission system into two steps, the impact of the macro variables to the micro performance of real industries and the impact of the micro performance to the stock returns. By analysize the efficiency of the two steps, the paper makes itself distinct with the predecessors.By using the cointegration analysis to study the correlation between macro variables and stock market, the paper has drawn some significant conclusions. l.The stock market of China has been the weak efficient market since 1996.2. The limited and unstable influence of macro-economy on stock market the correlation between stock return and macro variables, including GDP, the rate of GDP growth, M2, interest rates and inflation rate, cannot pass the cointegration test. Only the GDP growth direct correlates with the stock index under a 95% confidential interval, a 1% increase in GDP growth leading to a 0.1% increase in stock index. However, such a relationship will vanish after two terms lag, which shows an unstable relationship between the two variables. In other words, during the sample period (from Q1 1996 to Q3 2004), the model may have changed for some reasons, which implies the weak efficiency of the market. 3.The significant correlations between macro variables and the profitability of the listing companies on the industrial layer. Althoughtaking the listing companies as a whole, the author failed to find any significant impacts of the macro variables on the micro profitability, the impacts on the specific industrial groups are significant. However such impacts are reflected more in the form of the gross profit ratios, but still insignificant in the form of ROE, again, implying the investment activities as the major engine for the economic growth in China. 4. The significant correlations between ROE of the listing companies and the stock return on the industrial layer. Although taking the listing companies as a whole, the author failed to fi

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