An analysis of the impacts of macroeconomic fluctuations on China’s stock market

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Abstract

Research of influence of macroeconomic fluctuations on stock markets suggests different kinds of relationship between them. This paper aims to analyze the relationship between Shanghai Composite Index and China’s macroeconomic indexes applying cointegration method and different metrics of money supply: M1 and M2. The time period of data in this paper spans from Quarter 1, 1995 to Quarter 4, 2018. The Vector Error Correction Model (VECM) constituted suggests that: 1) there is a long-run equilibrium between these variables; 2) in the long run, despite of different measures of money supply, real GDP is negatively correlated with SCI, implicating a deviation of a stock market from real economy; 3) in the short run, no matter what measure of money supply we use, real GDP seems to have no significant effect on SCI, which again verifies the deviation of the stock market from real economy. The impulse response analysis suggests the totally opposite direction of effect that money supply and interest rate have on SCI in different specifications, and the forecast-error decomposition analysis indicates that SCI cannot fully reflect macroeconomic fluctuations once again.

Keywords: Stock Market, Macroeconomic Fluctuation, Cointegration, VECM

JEL Classification: E44, G14

Received: 26.03.2019

Accepted: 13.06.2019

Published online: 14.06.2019

How to cite this paper: Lingnan, L., (2019). An analysis of the impacts of macroeconomic fluctuations on China’s stock market. Journal of Governance & Regulation, 8(2), 49-60. https://doi.org/10.22495/jgr_v8_i2_p5