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CentreforGlobalFinanceWorkingPaperSeries(ISSN2041-1596)PaperNumber:03/10Title:InternationalDeterminantsofStockMarketPerformanceinChina:ACointegrationApproachAuthor(s):J.
G.
Garza-Garcia;Y.
Yue.
CentreforGlobalFinanceBristolBusinessSchoolUniversityoftheWestofEnglandColdharbourLaneBristolBS161QYTelephone:01173283906Email:cgf@uwe.
ac.
ukWebsite:http://www.
uwe.
ac.
uk/bbs/research/cgf/2InternationalDeterminantsofStockMarketPerformanceinChina:ACointegrationApproachJesúsG.
Garza-GarcíaaBancodeMéxicojgarza@banxico.
org.
mxYueYubUniversityoftheWestofEnglandYue.
Yu@uwe.
ac.
ukThisversion:2March2010AbstractThispaperexaminesthemacroeconomicdeterminantsoftheShanghaiCompositeIndex(SCI)performanceincludingtheinfluenceofUSmacro-variablesinChinesestockprices.
WeemploytheJohansenMaximumLikelihoodtodeterminewhetheracointegrationrelationshipexistsbetweendomesticandinternationalmacroeconomicvariablesandtheSCIandGranger-causalityteststodeterminewhethertheSCIisaleadingindicatorformacroeconomicvariables.
ThemainfindingssuggestthatChinesestockpricesaredeterminedbychangesindomesticvariables,namely:inflation,industrialproduction,moneysupply,short-terminterestratesandtheexchangerate.
ThispaperalsofindsargumentsthatsuggestthatUSeconomicandfinancialindicators,namelytheDowJonesIndustrialAverage,industrialproductionandtheconsumerconfidenceindex,aresignificantlyrelatedtoChinesestockprices.
TheGranger-causalitytestprovidesevidencethattheShanghaiCompositeIndexisaleadingindicatorformacroeconomicvariablesandthattheUSstockindexisrelatedtotheChinesestockindexperformance.
Keywords:stockmarket,macroeconomicvariables,cointegration,Granger-causality.
JELClassification:G10,G15a(Correspondingauthor)DirectionoftheAnalysisoftheFinancialSystem,BancodeMéxico,Ave.
5demayo#1piso1,Del.
Cuauhtémoc,México,D.
F.
Phone:+52(55)523-723175,Email:jgarza@banxico.
org.
mx.
CentreforGlobalFinanceatBristolBusinessSchool(UWE).
Email:Jesus.
Garzagarcia@uwe.
ac.
uk.
bDepartmentofEconomics.
BristolBusinessSchool.
UniversityoftheWestofEngland.
yue.
yu@live.
uwe.
ac.
uk.
31.
IntroductionOverthelastfewdecades,variousstudieshaveexaminedstockpricemovementsinresponsetochangesinarangeofmacroeconomicandfinancialvariables,acrossanumberofdifferentstockmarketsoverarangeofdifferenttimehorizons(e.
g.
Chen,RollandRoss,1986,GeskeandRoll,1983,MukherjeeandNaka,1995,Nasseh,andStrauss,2000).
Anecdotalevidencesuggeststhatinvestorsarenormallyconvincedofthedirectrelationshipbetweenmacroeconomicandfinancialnewsandtheperformanceinthestockmarkets(Ganet.
al.
,2006).
However,itisinterestingtounderstandtherealrelationshipbetweenfundamentalsandstockmarkets.
MostofthestockmarketstudiesthathavebeenpublishedargueabouttherelationshipsbetweenstockpricesandmacroeconomicvariablesindevelopedcountriessuchastheUS(Chen,RollandRoss,1986,Fama,1981),Japan(MukherjeeandNaka,1995)andEuropeancountries(NassehandStrauss,2000).
Emergingstockmarkets,however,aremuchlessexplored.
Recently,increasingattentionhasbeendrawnfromacademicresearchersintolessdevelopedmarkets(seeAdel(2004)forJordan;Ganet.
al.
(2006)forNewZealand;MaysamiandKoh(2000)forSingapore;SamitasandKenourgios(2007)forCentralEasternEuropeancountries,amongothers).
ThispaperaimstoinvestigatetherelationshipsbetweenstockpricesandmacroeconomicvariablesfortheperiodJan1992-Dec2008inChinausingcointegrationandGranger-causalitytests.
WedrawupontheoryandexistingempiricalworkasamotivationtoselectanumberofdomesticmacroeconomicvariablesthatwemightexpecttobestronglyrelatedtorealstockpricechangesinChina.
Inadditiontothat,weinvestigatewhetherthestockpricesinChinaarecointegratedwiththeworldmarkets,namelytheUS.
Thispaperisorganizedasfollows.
Section2discussestherecentdevelopmentoftheChinesestockmarket,Section3reviewspreviousliteratureontherelationshipbetweenmacroeconomicvariablesandstockprices,Section4presentsthemethodologyanddatausedinthestudy,Section5presenttheempiricalresultsandfinally,Section6concludes.
42.
ThedevelopmentoftheChinesestockmarketChinaestablishedtwostockexchanges(ShanghaiandShenzhen)duringtheearly1990sinordertoraisecapitalandimprovetheoperatingperformanceforstate-ownedenterprises(SOEs).
aIn1992,Chinahadonly53publiclistedcompaniesandatotalmarketvalueof$732millionUSdollars.
China'sstockmarketshavegrownintotheeighthlargestintheworld,withamarketcapitalizationofoverUS$500billionby2002(Bai,2004).
Nowadays,ithas1,602listingcompaniesandthetotalmarketvaluehasrisento$2,154billionUSdollars(SSE,2009).
bChina'sstockmarketisalsocharacterizedaslessdevelopedandhighlyspeculative.
Azad(2009)indicatesthatChineseinvestorsspeculatewithstocksharesdisregardingtheirfundamentalvalueandcompanies'performance.
Individualsfocusonshort-termpricefluctuationbasedonnewsthroughthegrapevine;suchpricemovementorvolatilityisattributedtoexcessivespeculation.
GiventhespecialfeaturesoftheChinesestockmarket,itisinterestingtoanalyseifthereareanylong-termrelationshipsbetweentheChinesestockmarketsandsomeunderlyingmacroeconomicvariables.
Forthepastseveralyears,ithasdrawnincreasingattentionfromacademicsbecauseofitsrapidexpansionintermsofcapitalization,turnoverandthenumberoffirmslisted.
Thecurrentfinancialworldisdominatedbyintegratedandindependentmarketswithinwhichgeographicandsectorboundarieshavelimitedimpacts(Walker,2007).
Marketparticipantsareawarethatindependentmarketstranscendbeyondnationalbordersandarehighlysensitivetoeconomicandpoliticaldevelopmentsanywhereintheworld(Bernanke,2007).
ZhangandZhao(2004)pointoutthattheChinesemarketissegmentedfromtheworldmarketasdomesticinvestorslacklegitimateaccesstointernationalarbitrageopportunitiesbecauseofforeignexchangeandinvestmentcontrol.
caTwotypesofsharesarecurrentlytradedinthesemarkets:ClassAsharesdenominatedinlocalcurrencytodomesticinvestorsandClassBshareslistedontheShanghaiStockExchange(denominatedinUSdollars)andClassBshareslistedontheShenzhenStockExchange(denominatedinHongKongdollars).
TheprocessofintegrationoftheChinesestockmarketcontinuestobeinfluencedbytherestrictionsimposedbytheChinesegovernment,particularlyoncapitalflowsandcurrencyconvertibility(WangandIorio,2007).
bAccordingtoBloomberg(2009),ChinaovertookJapanastheworldsecond-largeststockmarketbyvalue.
TheriseoftheShanghaiCompositeIndexinJuly16,2009ledthevalueofChina'sdomesticmarketto$3.
21trillion,comparedwithJapan's$3.
20trillion.
cTheChinesegovernmentadoptedapeggedexchangerateagainstUSdollarsince1998,astableparityaround8.
27yuan/dollar.
Meanwhile,theClass-Asharemarketdidnotopentointernationalinvestorsuntil2002.
5However,theChinesegovernmenthasbeenmakingprogressonrelaxingbothcontrolsoncapitalflowsandcurrencyconvertibility.
aAspointedoutbyFedorovandSarkissian(2000),theintegrationacrossglobalmarketswithinasinglecountryhaslargelybeenignored,especiallyinAsianemergingmarkets.
Theimpactofinternationalglobalisationandincreasedcapitalmarketintegrationhasdrawnattentionfromresearchers.
MasihandMasih(1999)findthatfinancialintegrationamonginternationalmarketshasincreasedsincetheAsianfinancialcrisisin1997.
However,ChanandLo(2000)findthatChineseA-sharemarketswerecloselyrelatedwithdomesticmacroeconomicvariablesbutnotwithInternationalstockmarkets.
TherestrictionsrelaxationhasbenefitedforeigninvestorsandhasleadtoanincreaseinforeigninvestmentintotheChinesestockmarket.
Inaddition,technologicaladvancesaremakingtradingactivitiesbetweenmarketsandnationseasierthaneverbefore.
TheinteractionbetweentheChineseeconomyandothereconomies,particularlytheUS,andhasintensifiedbecauseofrecentglobalfinancialcrisisandotherrelativepolicesinChina.
However,fewstudieshavecontributedtotheliteratureontherelationshipbetweentheChinesestockmarketpricesandinternationalmacroeconomicactivities.
Withtheaccelerationoftheprocessofopenness,thestockmarketofChinahasconsistentlysharedthepositiveeconomicgrowthtrendsinthecountry,whilstatthesametimebenefittingfromanintegralinternationalglobalmarket.
ItseemsinterestingtoobserveifanyforeignmacroeconomicorfinancialvariableshaveadirectrelationshipwiththeChinesestockmarket.
3.
LiteratureReviewChen,RollandRoss(1986,pp.
384)statethat"nosatisfactorytheorywouldarguethattherelationbetweenfinancialmarketsandthemacroeconomyisentirelyinonedirection.
"AlongtermequilibriumrelationbetweenstockpricesandrelevantmacroeconomicvariablesintheUSmarkethasbeenfairlyextensivelyresearched(e.
g.
Fama1981,and,Chen,RollandRoss1986).
Theyappliedavectorautoregressivemodelandconcludedthatmacroeconomicvariablesincludingindustrialproduction,aIn2002,theChineseA-sharemarketwasopenedtotheQualifiedForeignInstitutionalInvestors(QFII).
Twelveforeigninstitutionshadbeenapprovedtoinvestbytheendof2003withatotalapprovedinvestmentquotaof$1.
7billionUSdollars(WangandIorio,2007).
Moreover,theChinesegovernmenthaseliminatedalltherestrictionsoutlinedintheQFIIpolicyinanattempttoattractmoreforeigncapital.
Asaresult,65QFIIlicenceshavebeengrantedbyChina'ssecuritiesregulatorandover$30billionUSdollarsquotahavebeengiventotheseinstitutionsinAugust,2008(Walkeret.
al,2009).
6inflation,USTreasury-billrate,thelong-termgovernmentbondrate,consumptionandoilpricesarecausallyrelatedtosharepricesintheUS.
However,PoonandTaylor(1991)paralleltotheChen,RollandRoss(1986)studytheUKmarket,findingthatmacroeconomicvariablesdonotappeartoaffectsharepricesintheUK.
NasshehandStauss(2000)applytheJohansen's(1990)vectorerrorcorrectionmodel(VECM)toanalysethelongrunstockpricesanddomesticandinternationaleconomicactivityinsixEuropeaneconomies.
Theyconcludedthatacointegratingrelationindeedexistedandstockpricesaresignificantlyrelatedtodomesticindustrialproduction,businesssurveysofmanufactureorders,shortandlong-terminterestrates.
MukherjeeandNaka(1995)analysetherelationshipbetweentheJapanesestockmarketandindustrialproduction,inflation,moneysupply,long-termgovernmentbondrateandcallmoneyrateaEarlierstudiesbyFama(1981)andGeskeandRoll(1983)demonstratethatstockpricesarestronglyrelatedtomeasuresofdomesticactivitysuchaschangesintherealindustrialproductiongrowthorinterestratesbyusingUSdata.
TheyalsosuggesttheUSstockindexisaleadingindicatorforeconomicvariables.
KwonandShin(1999)findthattheKoreanstockmarketiscointegratedwithasetofmacroeconomicvariablesusingtheEngle-Grangercointegrationtest.
ButtheyfindthattheKoreanstockindexisnotaleadingindicatorofeconomicvariablesbyusingtheGranger-causalitytest.
Ganet.
al.
(2006)alsosuggestthattheNewZealandstockindexisnotaleadingindicatorofeconomicvariables.
,andtheexchangerate.
TheyalsofindacointegratingrelationbetweenJapanesestockpricesandtheseunderlyingmacroeconomicvariables.
AnumberofstudieshavealreadyappliedbothcointegrationtestsandGrangercausalityteststoaddresstheissueoftherelationshipbetweenequitymarketanddomesticmacroeconomicvariablesindifferentmarkets(KwonandShin,1999,Ganet.
al.
,2006).
Otherstudiesappliedbothteststoaddresstheissueoftherelationshipsamongdifferentmarketindexes(Laurenceet.
al.
,1997,KimandShin,2000)Huanget.
al.
(2000)studytherelationshipbetweentheUS,JapaneseandChinesestockpricesbyusingtheGrangercausalitytestanddonotfindanycointegration.
Groenewoldet.
al.
(2004)arguethatusingthreeorfouryearspostcrisisdataisnotsufficienttotestcointegrationbecausethetestedcointegrationcouldbeatemporaryphenomenonanddisappearquickly.
Tian(2007),incontrastwithpreviouswork,aLendingrateforloansintheTokyocallmoneymarketi.
e.
shortterminterestrate7findsthatthereiscointegrationbetweenChinesestockpricesandtheUSstockmarketaftertheAsianfinancialcrisis.
HisdatacoverstheperiodsincetheChineseA-sharewasopenedtotheQualifiedForeignInstitutionalInvestors(QFII)in2002.
HesuggeststhattheintroductionofforeigninvestmentshasincreasedthelinkagebetweentheChineseandtheinternationalstockmarkets.
WangandIorio(2007)findthereisnoevidencethattheA-sharemarketindexisbecomingincreasinglyintegratedwithInternationalmarketsfortheperiodfrom1995-2004.
Gaoet.
al.
(2007)findthattheChinesestockmarkethasnotonlyshortrun,butalsolong-termcointegrationrelationshipswiththeworld'sprimarymarketsincludingtheDowJones.
However,theirstudyonalong-termrelationshipwasbasedontheJohansenco-integrationtest,andtheirdataperiodonlycovers2005-2006.
Theevidenceisinsufficienttoidentifythislong-termrelationship.
Theongoingdebatesonthistopicarestillcontroversial.
3.
MethodologyThisstudyemploystheJohansencointegrationtestandGranger-causalitytesttodeterminewhetherselectedmacroeconomicvariablesarecointegratedandpossiblycausallyrelatedwithstockpricesinChina.
3.
1JohansenCointegrationTestThemostimportantapproachtoanalyzenon-stationarytimeseriesdataisthevectorautoregression(VAR)andcointegrationmethods.
aaToanalyzethelong-termequilibriumrelationshipbetweenstockreturnsandmacroeconomicvariables,cointegrationanalysisismoreappropriatecomparedtotheVARmodelbecausethecointegrationmethodcanexplorethedynamicco-movementsamongthevariables(MukherjeeandNaka,1995).
Cointegrationisamethodofdefiningthelong-termrelationshipamongagroupoftimeseriesvariables.
Itusestheideaofintegratedtimeseriesindescribingthelongruninteractionandaroseinthecontextofthespuriousregressionproblem.
Toberelatedtooneanotherstatisticallyinthelongrun,variablesmustbeofthesameorderofintegration.
Thepresenceofcointegrationamongrelevantvariablesimpliesthatalinearcombinationofnon-stationarytimeseriesvariablesisstationary.
Cointegrationreferstoalinearcombinationofnon-stationarytimeseriesthatresultinastationarytimeseriesinthepresenceofcointegrationamongthevariables(Granger,1986).
8TheJohansen's(1991)vectorerrorcorrectionmodelyieldsmoreefficientestimatorsofcointegratedvectorscomparedtoEngleandGrangercointegrationtests.
aJohansen(1991)developedthevectorerrorcorrectionmodelas:∑=++Γ+=11kjtktjtjtYYYεαβ(1)whereisafirstdifferencenotation,jtYis1*pvectorintegratedoforderone;is1*pconstantvectorrepresentingalineartrendinasystem,kisalagstructure;tεis1*pGaussianwhitenoiseresidualvector;Γjispp*matrixindicatingshort-termadjustmentsamongvariablescrosspequationsatthejthlag;αisrp*speedofadjustment;βisrp*cointegratingvectors.
Alongtermequilibriumrelationship(stationarylinearcominbationsofβ'Υt-k)isfoundwhenvariablearecointegratedevenifYtisnon-stationary.
Asevidentfromequationabove,inthepresenceofcointegration,aVARinfirstdifferencesismisspecified,asitomitstheerrorcorrectionterm(αβ'Υt-k)andthusoverlooksthelong-termequilibriumrelation(Johansen,1988).
WefirstexaminethestationarityofallthevariablesusingtheaugmentedDickey-Fullerunitroottesttoinsurethattheregressionresultsobtainedarerobust.
bTheapplicationofJohansenlikelihoodratioteststhenumberofcointegrationvectors(r):thetracetestandthemaximumEigenvaluetest.
Thetracestatisticsteststhenullhypothesisofr=0(i.
e.
nocointegration)againstthealternativethatr>0(i.
e.
thereisoneormorecointegrationvectors).
ThemaximumEigenvaluestatisticstestthenullhypothesisthatthenumberofcointegratingvectorsisragainstthespecificalternativeofr+1cointegratingvectors.
Ifallthevariablesarenotstationaryintheformofaunitroot,thefirstorderdifferenceshouldbeusedinthemodelingprocedure.
Wethencheckforcointegrationintermsofstockpricesandmacroeconomicvariables.
Ifcointegrationexistsamongallvariables,anerrorcorrectiontermshouldbeaddedtotheestimationprocedure(EngleandGranger,1987).
aThisisbecausetheJohansen's(1991)VECMisafullinformationmaximumlikelihoodestimationmodel,whichallowsfortestingcointegrationinawholesystemofequationsinonestep,withoutrequiringaspecificvariabletobenormalized.
bTheoptimallaglengthdeterminedbytheAkaikeInformationCriterion(AIC),theSchwarzBayesianCriterion(SBC)andtheHannan-QuinnCriterion(HQC).
9Weestablishamodelusingthevectorerrorcorrectionmodelwhichisstatedinthefollowingequations.
BothequationsbelowaimtoestimatethecointegratedvectorusingChinesedataalongwiththeUSdataasfollows:trrtttttttttttUSIRUSSIRUSCCIUSIPDJIAERIRLIRSIRIPCPISCIεβββββββββββα++++++++++++=1110987654321(2)nt.
.
.
.
.
1=whereSCIistheShanghaicompositeindex,αistheconstant,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-terminterestrate,LIRislong-terminterestrate,ERisexchangerate,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction,USCCIistheUSconsumerconfidenceindex,USSIRistheUS3-monthsTreasurybillyield,USLIRistheUS20yearsmaturitybondsyield.
3.
2GrangerCausalityTestGranger(1969)proposesamethodofdescribingtherelationshipbetweentwo(ormore)variablesinordertoobservethedirectionofcausality.
Considerthevariables:tXandtY,theGranger-causalitytestcanbeappliedasfollows:∑∑==++=piqjtjtjtitXYY111βα(3)Therestrictedmodelistherefore:∑=+=pittitYY11να(4)wheretandtνarewhitenoise,pistheorderoflagY,andqistheorderoflagX.
Thenullhypothesisforequation(5)is:∑===qjjH100β(5)suggestingthatthelagtermsjtXdoesnotGrangercausetYintheregression.
ThehypothesesaretestedusinganFtest.
103.
3DataWeselectsevendomesticmacroeconomicvariablesandfiveinternationalmacroeconomicvariablesbasedontheirhypothesizedeffectoneitherthecashflowsortherequiredrateofreturn.
ThedefinitionofthevariablesusedtoproxytheChinesestockmarketandthemacroeconomicvariablesareprovidedinTable1.
Table1DefinitionofvariablesVariableDefinitionShanghaiCompositeIndex(SCI)Indexofmarket-value-weightedaverageofmonthlyclosingpricesforallshareslistedontheShanghaiStockExchangeInflation(CPI)ConsumerpriceindexIndustrialProduction(IP)SeasonallyadjustedindustrialproductionindexMoneysupply(M1)NarrowlydefinedmoneysupplyShortterminterestrate(SIR)One-yeartimedepositratesetbythecentralbankLongterminterestrate(LIR)Five-yeartimedepositratesetbythecentralbankExchangerate(ER)End-of-monthpriceofU.
S.
dollarintermsofChineseYuanChineseexports(EXPORT)MonthlyChineseexportsDowJonesIndustrialAverage(DJIA)MonthlyclosingindexofDowJonesIndustrialAverageU.
S.
industrialproduction(USIP)USseasonallyadjustedindustrialproductionindexU.
S.
Consumerconfidenceindex(USCCI)MonthlyindexoftheUShouseholdsurveyofconsumer'sopinionsoncurrentconditionsandfutureexpectationsoftheeconomyU.
S.
shortterminterestrate(USSIR)USthreemonthstreasurybillyieldU.
S.
longterminterestrate(USLIR)End-of-montharithmeticaveragesyieldtomaturityoftheUSbondswith20yearstomaturityTable2providesthedescriptivestatisticsofthevariables.
Thedataintable2areinlevels,andtable3belowshowsthedatainfirstdifferences.
Thesampleperiodconsistsof204observations.
ThestartingdateistheearliestdateforwhichtheinformationoftheShanghaiA-shareindexavailableinDataStream.
WeselecttheShanghaiStockCompositeindex,DowJonesIndustrialAverageasthestockpriceindexesforChinaandtheUSrespectively.
Thisstudyfocusesonthemainland11ChinesestockmarketandconsiderstheShanghaiCompositeIndex(SCI)becauseofitssizeandmarketvalue.
Wechoosetheindustrialproduction,consumerconfidenceindex,short-terminterestrateandlong-termbondyieldasproxiesforinternationalmacroeconomicactivitiesintheUS.
Wechosetheconsumerconfidenceindexoverprivateconsumptionbecausetheconsumerconfidenceindexissurveyedonamonthlybasis.
Table2DescriptiveStatisticsofAllVariables:January1992toDecember2008VariableObservationMeanStandardDeviationMinMaxlog_SCI2047.
2260.
5465.
7478.
741log_CPI2044.
6550.
0644.
5834.
850log_IP2042.
6820.
1452.
4743.
099log_M12046.
3690.
7625.
0857.
798log_SIR2041.
0090.
4820.
5361.
896log_LIR2041.
6840.
5991.
0262.
629log_ER2042.
0530.
1271.
6882.
164log_EXPORT2045.
4880.
8973.
5147.
220log_DJIA2048.
9520.
4468.
0789.
542log_USIP2044.
5440.
1454.
2304.
722log_USCCI2044.
570.
2763.
6534.
975log_USSIR2041.
150.
741-4.
6051.
852log_USLIR2041.
7490.
1681.
1572.
104Notes:logmeansallseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-teminterestrate,LIRislong-terminterestrate,ERisexchangerate,EXPORTisChineseexports,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction,USCCIistheUSconsumerconfidenceindex,USSIRistheUS3-monthsTreasurybillyield,USLIRistheUS20yearsmaturitybondsyield.
FromTable2,thestandarddeviationofShanghaiCompositeIndexandDowJonesare0.
546and0.
446respectively.
ItcanbeobservedthattheChinesestockmarketpossesseshighervolatilitythantheUS.
ThishighvolatilitycanattributedtoexcessivespeculationinChina.
12Table3SummaryStatisticsofTimeSeriesTransformationVariableObservationsMeanStandardDeviationMinMaxlog[SCIt-SCIt-1]2030.
0090.
153-0.
3811.
063log[IPt-IPt-1]203-0.
0010.
049-0.
3770.
160log[M1t-M1t-1]2030.
0130.
041-0.
4350.
103log[ERt-1-ERt-1]2030.
0010.
029-0.
0160.
405log[DJIAt-DJIAt-1]2030.
0050.
042-0.
1640.
101log[USIPt-USIPt-1]2030.
0020.
006-0.
0400.
021Notes:meansalldataareinfirstdifference,logmeansallseriesareinnaturallogarithms,tiscurrentperiod,t-1ispreviousperiod,SCIisShanghaicompositeindex,IPisindustrialproduction,M1ismoneysupply,ERisexchangerate,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction.
TableA1providestheeconomicinterpretationofthefirstdifferenceinthelogarithmoftheselectedvariables.
a4.
ResultsTable3revealsthatovertheperiodstudied,theShanghaiCompositeIndex(SCI)grewatanimpressiverateof0.
9%permonthcomparedtotheDowJonesIndustrialAverage(DJIA)at0.
5%.
ThemonthlygrowthrateofmoneysupplyishigherthanthegrowthrateoftheChinesestockindex,atarateof1.
3%.
ThisresultsupportsKraftandKraft(1977)whoarguethatanincreaseinthemoneysupplyprovidesexcessliquidityforstockpurchases.
TheChineseindustrialproductiongrewatrelativelylowratecomparedtotheUS.
4.
1.
UnitRootTestThefirststageoftheanalysisistodetermineifthetimeseriesdataisnon-stationarybyusingtheAugmentedDickey-Fuller(ADF)test.
TheappropriatelaglengthsofeachindividualvariablehavetobedeterminedbeforetheADFtest(seeTableA2intheappendix).
Thenullhypothesisstatesthateachtimeseriescontainsaunitrootthatcannotberejectedforallvariables.
TheAugmentedDickey-FullerresultsareshowninTable4below,andshowthatthenullhypothesisofaunitrootcannotberejectedforallvariablesatthe5%levelexceptChineseexports(log_EXPORTS).
Therefore,itisconcludedthatalltimeseriesexceptChineseexports(log_EXPORTS)underinvestigationfollowanI(1)processandcointegrationtestscannowbeapplied.
aSeeappendixfortableA1.
13Table4UnitRootTest4.
2.
MultivariateCointegrationTestInthesecondstage,wepresenttheJohansencointegratingestimatesbetweenChinesestockpricesandbothdomesticandtheUSmacroeconomicvariables.
Table5showstheJohansen-Juseliuscointegrationtestresultsbasedonthetracestatistics(λtrace)andmaximumeigenvalues(λmax).
VECMinvolvesfirstdifferencesanderrorcorrectionterms,sothattherearetwolags.
ThelaglengthsarechosensothattheerrorsoftheVECMarenotcorrelated.
VariablesADFTestStatistics5%CriticalvalueStationaryornotlog_SCI-3.
416-3.
437Nolog_CPI-1.
797-3.
437Nolog_IP-2.
285-3.
437Nolog_M1-3.
191-3.
437Nolog_SIR-2.
229-3.
437Nolog_LIR-1.
645-3.
437Nolog_ER-2.
294-3.
437Nolog_EXPORT-3.
59-3.
437Yeslog_DJIA-0.
205-3.
437Nolog_USIP0.
981-3.
437Nolog_USCCI-0.
66-3.
437Nolog_USGILL3-0.
109-3.
437Nolog_USIR-2.
492-3.
437NoNotes:Allseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-teminterestrate,LIRislong-terminterestrate,ERisexchangerate,EXPORTisChineseexports,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction,USCCIistheUSconsumerconfidenceindex,USSIRistheUS3-monthsTreasurybillyield,USLIRistheUS20yearsmaturitybondsyield.
14Table5JohansenCointegrationRankTest(USmacroeconomicvariables)AcointegrationanalysisisappliedinordertomodelthelongrunequilibriumrelationshipbetweenChinesestockpricesandmacroeconomicvariables.
Werejectthenullhypothesisofnocointegratingequilibriumatthe5%level.
Basedonthedata,morethanonecointegratingvectorsamongstockprices,industrialproduction,consumerpriceindex,moneysupply,bothshortandlong-terminterestrate,exchangerate,andinternationalmacroeconomicvariablesexist.
WethenproceedtoestimatetheVECMmodel.
Inthepresenceofmorethanonecointegratingvector,JohansenandJuliusconsiderthefirsteigenvectortobethemostuseful.
Thecorrespondingvectoristhus:=1β(26.
48-68.
76-25.
22-2.
910.
61-67.
88-5.
6916.
06-4.
770.
43-2.
79200.
25).
ThesevaluesrepresentthecoefficientsforSCI(normalizedto1),andtheycanbeinterpretedaslong-termelasticitymeasuresduetologarithmictransformation.
Thevectorthencanbeexpressedas(Table6):ChinesestockpricesandbothdomesticandUSmacroeconomicvariables,1992.
1-2008.
12(Johansencointegrationranktest)H0Eigenvalue(λmax)Tracestatistic(λtrace)5%criticalvaluer=0464.
1832﹡277.
71r=10.
44209346.
3057﹡233.
13r=20.
35859256.
6002﹡192.
89r=30.
29168186.
9378﹡156r=40.
2401131.
4762﹡124.
24r=50.
1868589.
694794.
15Notes:=thenumberofcointegratingvectors.
*denotesthestatisticsaresignificantat5%level.
15Table6JohansenCointegrationTest(USmacroeconomicvariables)Giventheevidenceinfavorofatleastonecointegratingvector,wenormalizethecointegratingvectoronthestockpriceandfindsignificantpositivecoefficientsonindustrialproduction;short-terminterestrate,moneysupplyandexchangerate(seeTable6).
Table6alsoshowsthatthestockpriceisnegativelyrelatedtoinflation.
However,long-terminterestratehasnosignificantimpactontheChinesestockindex.
TheerrorcorrectionmodelshowsthattheShanghaiCompositeIndex,inflation,industrialproduction,moneysupply,short-terminterestrateandexchangerateallcontributetotheerrorcorrectionprocess.
TheresultsusingChinesedataarepartiallyconsistentwiththeexistingliteratureandevidence.
Asexpectedwefindapositiverelationshipbetweenindustrialproductionandthestockprices.
FamaandSchwet(1977)andGeskeandRoll(1983)findapositiverelationshipbetweenstockpricesandindustrialproduction.
Wefindthattheinflation(CPI)hasanegativeimpactonstockprices,whichisalsoconsistentwithotherstudies(Chen,RollandRoss1986,MukherjeeandNaka1995).
SinceVariableCoefficientStandardDeviationlog_SCI1log_CPI-26.
48296*5.
41log_IP68.
76021*6.
007log_M125.
21913*7.
605log_SIR2.
911015*1.
076log_LIR-0.
60814460.
815log_ER67.
87856*6.
811log_DJIA5.
685336*2.
223log_USIP-16.
05585*7.
692log_USCCI4.
766522*1.
407log_USGILL3-0.
4300350.
457log_USLIR2.
7907881.
932_cons-200.
2474Notes:Allseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-teminterestrate,LIRislong-terminterestrate,ERisexchangerate,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction,USCCIistheUSconsumerconfidenceindex,USGILL3istheUS3-monthsTreasurybillyield,USLIRistheUS20yearsmaturitybondsyield.
*denotesthestatisticsaresignificantat5%level.
16genuineinflationislikelytobedistortedbyfinancialrepression,anincreaseinChineseinflationmaystillplaytheroletochangetheexpectationofinvestors'requiredrateofreturnbyincreasingthenominalrisk-freerateaswellasthediscountrate.
Theeffectofmoneysupplyonstockpricesisfoundtobesignificantlypositive,whichisconsistentwiththeliterature.
MukherjeeandNaka(1995)alsofindapositiverelationshipbetweenstockpriceandmoneysupplyinJapan.
Short-terminterestrateshaveasignificantpositiveimpactonChinesestockprices,whichisconsistentwithMukherjeeandNaka(1995).
However,long-terminterestratesarenotsignificant.
Apossibleexplanationforthisresultisthatlong-terminterestratesdonotserveasproxyforthenominalrisk-freecomponentusedinthediscountrateinthestockvaluationmodels.
TheexcessivevolatilityofChinesestockpricesperhapscancelsoutthesensitivityofmarketreactiontowardslong-terminterestrate.
LiuandShrestha(2008)applytheJohansen'scointegrationtestanddonotfindsignificantrelationshipsbetweenChinesestockpricesandbothshortandlong-terminterestrates.
TherelationshipbetweentheChinesestockpricesandtheexchangerateispositive.
ThisissimilartothefindingsofMaysamiandKoh(2000),suggestingthatahighvolumeoftrade(importsandexports)intheChineseeconomyprovidesastrongerdomesticcurrency,whichlowersthecostofimportedinputsandallowsdomesticproducerstobemorecompetitiveinternationally.
Sinceweareinterestedintherelationshipbetweenstockprices,domesticvariablesandinternationalvariables,weaddedtheUSstockprices(DJIA),industrialproduction(IP),theUSconsumerconfidenceindex;3-monthTreasurybillandUSlong-termbondyieldthesefivevariablesandtestthecointegratingrelationships.
Accordingtotable6,theChinesestockpriceshaveasignificantpositiverelationshipwiththeDowJonesIndustrialAverageandtheUSconsumerconfidenceindex.
TheUSindustrialproductionpresentsanegativerelationshipwiththeChinesestockindex.
Boththe3-monthTreasurybillandbondyields,however,areinsignificant.
Thenumberofcointegratingrelationshipsinmostcasesissimilar,moreimportantly,thedomesticvariablespossesssimilarsignsandcoefficientstotheresultsreported,hencetheresultsarerobusttotheadditionofinternationalvariables.
TheresultsindicatethattheDowJonesIndexissignificantlyrelatedtoChinesestockprices.
OurfindingsareconsistentwithTian(2007);anincreaseintheUSindustrialproductionsignificantlyaffectsstockpricemovementsinChina.
TheUSconsumerconfidenceindexhasasignificantandpositiveimpactonChinesestock17prices,whichisconsistentwiththeliterature.
Clearly,anincreaseoftheUSconsumerexpenditurewillleadtogreatercashflow,hencehigherstockpricesforChinesecompanies.
Accordingtothetable6,bothshortandlong-termUSinterestrateshaveinsignificantimpactsonChinesestockprices.
ThisisnotconsistentwithNassehandStrauss(2000)whofindapositiverelationshipbetweenGermaninterestratesandfourEuropeanstockmarkets.
ThisisperhapscausedthefactthatChineseinterestratesdonotaffectthediscountrate,hencethestockprices.
4.
3Granger-CausalityTestTheGranger-causalitytestisconductedtostudythelead-lagrelationshipsbetweenthemacroeconomicvariablesandtheShanghaiCompositeIndex.
Theresultsarereportedintable7.
TheyindicatethattheShanghaiCompositeIndexGrangercausesinflation,moneysupply,bothshortandlong-terminterestrateaswellasChineseexportsinthesampleperiod.
ThissuggeststhattheShanghaiCompositeIndexisaleadingindicatorforeconomicvariablesinChina,whichisconsistentwithempiricalresultsconductedintheUS(Fama,1991).
Arationalexplanationisthattheratioofcapitalizationofthestockmarkettogrossdomesticproduct(GDP)inChinaisconsiderablylarge,therefore,theimpactofcapitalmarketonthewholeeconomyisalsohigh.
18Table7Granger-Causality:Test1Table8Granger-Causality:Test2H0LagF-statisticP-valueRejectH0orNotLog_SCIdoesnotGrangerCauseLog_CPI322.
690.
00YesLog_SCIdoesnotGrangerCauseLog_IP31.
030.
38NoLog_SCIdoesnotGrangerCauseLog_M11357.
080.
00YesLog_SCIdoesnotGrangerCauseLog_SIR423.
770.
00YesLog_SCIdoesnotGrangerCauseLog_LIR1110.
150.
00YesLog_SCIdoesnotGrangerCauseLog_ER11.
450.
23NoLog_SCIdoesnotGrangerCauseLog_EXPORTS460.
090.
00YesLog_SCIdoesnotGrangerCauseLog_DJIA10.
472520.
40NoNotes:Allseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-teminterestrate,LIRislong-terminterestrate,ERisexchangerate,DJIAisDowJonesIndustrialAverage.
H0isnullhypothesisofGranger-Causalitytest.
Lagislaglength.
H0LagF-statisticPvalueRejectH0orNotLog_DJIAdoesnotGrangerCauseLog_SCI1359.
540.
00YesNotes:Allseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,DJIAisDowJonesIndustrialAverage.
H0isnullhypothesisofGranger-Causalitytest.
Lagislaglength.
19Accordingtotable8,byapplyingtheGrangercausalitytest,log_DJIAdoesGrangercauselog_SCI.
TheresultsuggeststhatthestockpricechangesintheUScanbeusedtopredicttheChinesestockmarket.
ThefindingisconsistentwithLaurenceet.
al.
(1997).
TheyalsofindastrongcausaleffectfromtheUSstockmarkettoChinesestockmarkets.
5.
ConclusionThispaperexaminedtherelationshipsbetweentheShanghaiCompositeIndexandasetofmacroeconomicvariablesfortheperiodofJanuary1992toDecember2008.
ThetimeseriesdatasetemployedinthisstudyincludesmonthlyobservationsoftheShanghaiCompositeIndex(SCI),industrialproduction(IP),theinflationrate(CPI),narrowlydefinedmoneysupply(M1),bothshortandlong-terminterestrate(SIR,LIR),andtheexchangerate(ER).
ThestudyincludesUSmacroeconomicvariablesaswellastheirstockmarketindices.
WusetheJohansenmultivariatecointegrationteststoexaminewhethertheChinesestockmarketiscointegratedwithasetofmacroeconomicvariablesinthelongrun.
WealsoexaminewhethertheChinesestockmarketisaleadingindictorforeconomicvariablesbyemployingGranger-causalitytests.
ByemployingtheJohansen(1991)cointegrationanalysis,wefindthatalong-termrelationshipexistsbetweenstockpricesandthemacroeconomicvariables.
Whiletheindustrialproduction,moneysupply,shortterminterestrateandtheexchangeratearepositivelyrelatedtoChinesestockprices,inflationisnegativelyrelated.
ThisstudyshowsthattheChinesestockmarketdoesreacttochangesinthemacroeconomicvariablesinthelongrun,despiteitshighdegreeofspeculation,immaturityandshort-termvolatility.
However,long-terminterestratesareinsignificant.
Apossibleexplanationforthisresultisthatlong-terminterestratesdonotserveasproxyforthenominalrisk-freecomponentusedinthediscountrateinthestockvaluationmodels.
Thispaperhasmadecontributionstotheliteratureonthelong-termrelationshipsbetweenChinesestockpricesandinternationalmacroeconomicvariables,particularly,theUSmacroeconomicvariables.
Thecointegrationequationsarerobusttotheadditionofinternationalvariables,suggestingthattheChinesestockmarketisalsosensitivetotheUSmacroeconomicfactors,namely,DowJonesstockindex,theUS20industrialproductionandconsumerconfidenceindex.
TheDowJonesIndustrialAverage(DJIA)andtheUSconsumerconfidenceindexhavepositiveimpactsontheChinesestockprices;theUSindustrialproductionpresentsanegativeimpact.
TheimplicationisthattheChinesestockmarketswillbecomemoreintegratedwiththeUSstockmarketsastheChinesemacroeconomicactivitybecomesincreasinglyintegratedthroughtrade.
Finally,theGranger(1969)causalitytestsindicatesstatisticallysignificantrelationshipsbetweenChinesestockpricesandinflation,moneysupply,bothshortandlong-terminterestratesandChineseexports.
TheresultshowsthattheShanghaiCompositeIndexisaleadingindicatorformacroeconomicvariablesinChina.
TheresultsalsoshowthattheDowJonesGranger-causestheShanghaiCompositeIndexsuggestingthatchangesoftheUSstockindexcanbeusedtopredictChinesestockmarket.
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24AppendixTableA1TimeSeriesTransformationVariablesDefinitionlog[SCIt-SCIt-1]ReturnontheSCIlog[IPt-IPt-1]Growthrateofindustrialproductionlog[M1t-M1t-1]Growthrateofmoneysupplylog[ERt-ERt-1]Changesinexchangeratelog[DJIAt-DJIAt-1]ReturnontheDowJonesIndustrialAveragelog[USIPt-USIPt-1]GrowthrateofUSindustrialproductionNotes:meansallseriesareinfirstdifferenceform,logmeansallseriesareinnaturallogarithms,tiscurrentperiod,t-1ispreviousperiod,SCIisShanghaicompositeindex,IPisindustrialproduction,M1ismoneysupply,ERisexchangerate,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction.
.
TableA2LaglengthsofvariableVariablelagLLAICHQCSBClog_SCI0-152.
11.
5311.
537681.
5475194.
8962*-0.
92896*-0.
91561*-0.
89598*295.
551-0.
92555-0.
90553-0.
97608396.
1985-0.
92199-0.
89529-0.
85602496.
1986-0.
91199-0.
87862-0.
82953Log_SCI=ShanghaiCompositeIndex,lag=laglength,LL=Maximizedlog-likelihood,AIC=AkaikeInformationCriterion,HQC=Hannan-QuinnCriterion,SBC=SchwarzBayesianCriterion,"*"denotesAIC,HQCandSBCareallminimisedatalaglengthof1.
Variablelaglog_SCI1log_CPI3log_IP3log_M11log_SIR4log_LIR1log_ER1log_EXPORT4log_DJIA1log_USIP4log_USCCI1log_USGILL34log_USLIR325Notes:logmeansallseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-teminterestrate,LIRislong-terminterestrate,ERisexchangerate,EXPORTisChineseexports,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction,USCCIistheUSconsumerconfidenceindex,USSIRistheUS3-monthsTreasurybillyield,USLIRistheUS20yearsmaturitybondsyield.
Lagislaglength.
26
G.
Garza-Garcia;Y.
Yue.
CentreforGlobalFinanceBristolBusinessSchoolUniversityoftheWestofEnglandColdharbourLaneBristolBS161QYTelephone:01173283906Email:cgf@uwe.
ac.
ukWebsite:http://www.
uwe.
ac.
uk/bbs/research/cgf/2InternationalDeterminantsofStockMarketPerformanceinChina:ACointegrationApproachJesúsG.
Garza-GarcíaaBancodeMéxicojgarza@banxico.
org.
mxYueYubUniversityoftheWestofEnglandYue.
Yu@uwe.
ac.
ukThisversion:2March2010AbstractThispaperexaminesthemacroeconomicdeterminantsoftheShanghaiCompositeIndex(SCI)performanceincludingtheinfluenceofUSmacro-variablesinChinesestockprices.
WeemploytheJohansenMaximumLikelihoodtodeterminewhetheracointegrationrelationshipexistsbetweendomesticandinternationalmacroeconomicvariablesandtheSCIandGranger-causalityteststodeterminewhethertheSCIisaleadingindicatorformacroeconomicvariables.
ThemainfindingssuggestthatChinesestockpricesaredeterminedbychangesindomesticvariables,namely:inflation,industrialproduction,moneysupply,short-terminterestratesandtheexchangerate.
ThispaperalsofindsargumentsthatsuggestthatUSeconomicandfinancialindicators,namelytheDowJonesIndustrialAverage,industrialproductionandtheconsumerconfidenceindex,aresignificantlyrelatedtoChinesestockprices.
TheGranger-causalitytestprovidesevidencethattheShanghaiCompositeIndexisaleadingindicatorformacroeconomicvariablesandthattheUSstockindexisrelatedtotheChinesestockindexperformance.
Keywords:stockmarket,macroeconomicvariables,cointegration,Granger-causality.
JELClassification:G10,G15a(Correspondingauthor)DirectionoftheAnalysisoftheFinancialSystem,BancodeMéxico,Ave.
5demayo#1piso1,Del.
Cuauhtémoc,México,D.
F.
Phone:+52(55)523-723175,Email:jgarza@banxico.
org.
mx.
CentreforGlobalFinanceatBristolBusinessSchool(UWE).
Email:Jesus.
Garzagarcia@uwe.
ac.
uk.
bDepartmentofEconomics.
BristolBusinessSchool.
UniversityoftheWestofEngland.
yue.
yu@live.
uwe.
ac.
uk.
31.
IntroductionOverthelastfewdecades,variousstudieshaveexaminedstockpricemovementsinresponsetochangesinarangeofmacroeconomicandfinancialvariables,acrossanumberofdifferentstockmarketsoverarangeofdifferenttimehorizons(e.
g.
Chen,RollandRoss,1986,GeskeandRoll,1983,MukherjeeandNaka,1995,Nasseh,andStrauss,2000).
Anecdotalevidencesuggeststhatinvestorsarenormallyconvincedofthedirectrelationshipbetweenmacroeconomicandfinancialnewsandtheperformanceinthestockmarkets(Ganet.
al.
,2006).
However,itisinterestingtounderstandtherealrelationshipbetweenfundamentalsandstockmarkets.
MostofthestockmarketstudiesthathavebeenpublishedargueabouttherelationshipsbetweenstockpricesandmacroeconomicvariablesindevelopedcountriessuchastheUS(Chen,RollandRoss,1986,Fama,1981),Japan(MukherjeeandNaka,1995)andEuropeancountries(NassehandStrauss,2000).
Emergingstockmarkets,however,aremuchlessexplored.
Recently,increasingattentionhasbeendrawnfromacademicresearchersintolessdevelopedmarkets(seeAdel(2004)forJordan;Ganet.
al.
(2006)forNewZealand;MaysamiandKoh(2000)forSingapore;SamitasandKenourgios(2007)forCentralEasternEuropeancountries,amongothers).
ThispaperaimstoinvestigatetherelationshipsbetweenstockpricesandmacroeconomicvariablesfortheperiodJan1992-Dec2008inChinausingcointegrationandGranger-causalitytests.
WedrawupontheoryandexistingempiricalworkasamotivationtoselectanumberofdomesticmacroeconomicvariablesthatwemightexpecttobestronglyrelatedtorealstockpricechangesinChina.
Inadditiontothat,weinvestigatewhetherthestockpricesinChinaarecointegratedwiththeworldmarkets,namelytheUS.
Thispaperisorganizedasfollows.
Section2discussestherecentdevelopmentoftheChinesestockmarket,Section3reviewspreviousliteratureontherelationshipbetweenmacroeconomicvariablesandstockprices,Section4presentsthemethodologyanddatausedinthestudy,Section5presenttheempiricalresultsandfinally,Section6concludes.
42.
ThedevelopmentoftheChinesestockmarketChinaestablishedtwostockexchanges(ShanghaiandShenzhen)duringtheearly1990sinordertoraisecapitalandimprovetheoperatingperformanceforstate-ownedenterprises(SOEs).
aIn1992,Chinahadonly53publiclistedcompaniesandatotalmarketvalueof$732millionUSdollars.
China'sstockmarketshavegrownintotheeighthlargestintheworld,withamarketcapitalizationofoverUS$500billionby2002(Bai,2004).
Nowadays,ithas1,602listingcompaniesandthetotalmarketvaluehasrisento$2,154billionUSdollars(SSE,2009).
bChina'sstockmarketisalsocharacterizedaslessdevelopedandhighlyspeculative.
Azad(2009)indicatesthatChineseinvestorsspeculatewithstocksharesdisregardingtheirfundamentalvalueandcompanies'performance.
Individualsfocusonshort-termpricefluctuationbasedonnewsthroughthegrapevine;suchpricemovementorvolatilityisattributedtoexcessivespeculation.
GiventhespecialfeaturesoftheChinesestockmarket,itisinterestingtoanalyseifthereareanylong-termrelationshipsbetweentheChinesestockmarketsandsomeunderlyingmacroeconomicvariables.
Forthepastseveralyears,ithasdrawnincreasingattentionfromacademicsbecauseofitsrapidexpansionintermsofcapitalization,turnoverandthenumberoffirmslisted.
Thecurrentfinancialworldisdominatedbyintegratedandindependentmarketswithinwhichgeographicandsectorboundarieshavelimitedimpacts(Walker,2007).
Marketparticipantsareawarethatindependentmarketstranscendbeyondnationalbordersandarehighlysensitivetoeconomicandpoliticaldevelopmentsanywhereintheworld(Bernanke,2007).
ZhangandZhao(2004)pointoutthattheChinesemarketissegmentedfromtheworldmarketasdomesticinvestorslacklegitimateaccesstointernationalarbitrageopportunitiesbecauseofforeignexchangeandinvestmentcontrol.
caTwotypesofsharesarecurrentlytradedinthesemarkets:ClassAsharesdenominatedinlocalcurrencytodomesticinvestorsandClassBshareslistedontheShanghaiStockExchange(denominatedinUSdollars)andClassBshareslistedontheShenzhenStockExchange(denominatedinHongKongdollars).
TheprocessofintegrationoftheChinesestockmarketcontinuestobeinfluencedbytherestrictionsimposedbytheChinesegovernment,particularlyoncapitalflowsandcurrencyconvertibility(WangandIorio,2007).
bAccordingtoBloomberg(2009),ChinaovertookJapanastheworldsecond-largeststockmarketbyvalue.
TheriseoftheShanghaiCompositeIndexinJuly16,2009ledthevalueofChina'sdomesticmarketto$3.
21trillion,comparedwithJapan's$3.
20trillion.
cTheChinesegovernmentadoptedapeggedexchangerateagainstUSdollarsince1998,astableparityaround8.
27yuan/dollar.
Meanwhile,theClass-Asharemarketdidnotopentointernationalinvestorsuntil2002.
5However,theChinesegovernmenthasbeenmakingprogressonrelaxingbothcontrolsoncapitalflowsandcurrencyconvertibility.
aAspointedoutbyFedorovandSarkissian(2000),theintegrationacrossglobalmarketswithinasinglecountryhaslargelybeenignored,especiallyinAsianemergingmarkets.
Theimpactofinternationalglobalisationandincreasedcapitalmarketintegrationhasdrawnattentionfromresearchers.
MasihandMasih(1999)findthatfinancialintegrationamonginternationalmarketshasincreasedsincetheAsianfinancialcrisisin1997.
However,ChanandLo(2000)findthatChineseA-sharemarketswerecloselyrelatedwithdomesticmacroeconomicvariablesbutnotwithInternationalstockmarkets.
TherestrictionsrelaxationhasbenefitedforeigninvestorsandhasleadtoanincreaseinforeigninvestmentintotheChinesestockmarket.
Inaddition,technologicaladvancesaremakingtradingactivitiesbetweenmarketsandnationseasierthaneverbefore.
TheinteractionbetweentheChineseeconomyandothereconomies,particularlytheUS,andhasintensifiedbecauseofrecentglobalfinancialcrisisandotherrelativepolicesinChina.
However,fewstudieshavecontributedtotheliteratureontherelationshipbetweentheChinesestockmarketpricesandinternationalmacroeconomicactivities.
Withtheaccelerationoftheprocessofopenness,thestockmarketofChinahasconsistentlysharedthepositiveeconomicgrowthtrendsinthecountry,whilstatthesametimebenefittingfromanintegralinternationalglobalmarket.
ItseemsinterestingtoobserveifanyforeignmacroeconomicorfinancialvariableshaveadirectrelationshipwiththeChinesestockmarket.
3.
LiteratureReviewChen,RollandRoss(1986,pp.
384)statethat"nosatisfactorytheorywouldarguethattherelationbetweenfinancialmarketsandthemacroeconomyisentirelyinonedirection.
"AlongtermequilibriumrelationbetweenstockpricesandrelevantmacroeconomicvariablesintheUSmarkethasbeenfairlyextensivelyresearched(e.
g.
Fama1981,and,Chen,RollandRoss1986).
Theyappliedavectorautoregressivemodelandconcludedthatmacroeconomicvariablesincludingindustrialproduction,aIn2002,theChineseA-sharemarketwasopenedtotheQualifiedForeignInstitutionalInvestors(QFII).
Twelveforeigninstitutionshadbeenapprovedtoinvestbytheendof2003withatotalapprovedinvestmentquotaof$1.
7billionUSdollars(WangandIorio,2007).
Moreover,theChinesegovernmenthaseliminatedalltherestrictionsoutlinedintheQFIIpolicyinanattempttoattractmoreforeigncapital.
Asaresult,65QFIIlicenceshavebeengrantedbyChina'ssecuritiesregulatorandover$30billionUSdollarsquotahavebeengiventotheseinstitutionsinAugust,2008(Walkeret.
al,2009).
6inflation,USTreasury-billrate,thelong-termgovernmentbondrate,consumptionandoilpricesarecausallyrelatedtosharepricesintheUS.
However,PoonandTaylor(1991)paralleltotheChen,RollandRoss(1986)studytheUKmarket,findingthatmacroeconomicvariablesdonotappeartoaffectsharepricesintheUK.
NasshehandStauss(2000)applytheJohansen's(1990)vectorerrorcorrectionmodel(VECM)toanalysethelongrunstockpricesanddomesticandinternationaleconomicactivityinsixEuropeaneconomies.
Theyconcludedthatacointegratingrelationindeedexistedandstockpricesaresignificantlyrelatedtodomesticindustrialproduction,businesssurveysofmanufactureorders,shortandlong-terminterestrates.
MukherjeeandNaka(1995)analysetherelationshipbetweentheJapanesestockmarketandindustrialproduction,inflation,moneysupply,long-termgovernmentbondrateandcallmoneyrateaEarlierstudiesbyFama(1981)andGeskeandRoll(1983)demonstratethatstockpricesarestronglyrelatedtomeasuresofdomesticactivitysuchaschangesintherealindustrialproductiongrowthorinterestratesbyusingUSdata.
TheyalsosuggesttheUSstockindexisaleadingindicatorforeconomicvariables.
KwonandShin(1999)findthattheKoreanstockmarketiscointegratedwithasetofmacroeconomicvariablesusingtheEngle-Grangercointegrationtest.
ButtheyfindthattheKoreanstockindexisnotaleadingindicatorofeconomicvariablesbyusingtheGranger-causalitytest.
Ganet.
al.
(2006)alsosuggestthattheNewZealandstockindexisnotaleadingindicatorofeconomicvariables.
,andtheexchangerate.
TheyalsofindacointegratingrelationbetweenJapanesestockpricesandtheseunderlyingmacroeconomicvariables.
AnumberofstudieshavealreadyappliedbothcointegrationtestsandGrangercausalityteststoaddresstheissueoftherelationshipbetweenequitymarketanddomesticmacroeconomicvariablesindifferentmarkets(KwonandShin,1999,Ganet.
al.
,2006).
Otherstudiesappliedbothteststoaddresstheissueoftherelationshipsamongdifferentmarketindexes(Laurenceet.
al.
,1997,KimandShin,2000)Huanget.
al.
(2000)studytherelationshipbetweentheUS,JapaneseandChinesestockpricesbyusingtheGrangercausalitytestanddonotfindanycointegration.
Groenewoldet.
al.
(2004)arguethatusingthreeorfouryearspostcrisisdataisnotsufficienttotestcointegrationbecausethetestedcointegrationcouldbeatemporaryphenomenonanddisappearquickly.
Tian(2007),incontrastwithpreviouswork,aLendingrateforloansintheTokyocallmoneymarketi.
e.
shortterminterestrate7findsthatthereiscointegrationbetweenChinesestockpricesandtheUSstockmarketaftertheAsianfinancialcrisis.
HisdatacoverstheperiodsincetheChineseA-sharewasopenedtotheQualifiedForeignInstitutionalInvestors(QFII)in2002.
HesuggeststhattheintroductionofforeigninvestmentshasincreasedthelinkagebetweentheChineseandtheinternationalstockmarkets.
WangandIorio(2007)findthereisnoevidencethattheA-sharemarketindexisbecomingincreasinglyintegratedwithInternationalmarketsfortheperiodfrom1995-2004.
Gaoet.
al.
(2007)findthattheChinesestockmarkethasnotonlyshortrun,butalsolong-termcointegrationrelationshipswiththeworld'sprimarymarketsincludingtheDowJones.
However,theirstudyonalong-termrelationshipwasbasedontheJohansenco-integrationtest,andtheirdataperiodonlycovers2005-2006.
Theevidenceisinsufficienttoidentifythislong-termrelationship.
Theongoingdebatesonthistopicarestillcontroversial.
3.
MethodologyThisstudyemploystheJohansencointegrationtestandGranger-causalitytesttodeterminewhetherselectedmacroeconomicvariablesarecointegratedandpossiblycausallyrelatedwithstockpricesinChina.
3.
1JohansenCointegrationTestThemostimportantapproachtoanalyzenon-stationarytimeseriesdataisthevectorautoregression(VAR)andcointegrationmethods.
aaToanalyzethelong-termequilibriumrelationshipbetweenstockreturnsandmacroeconomicvariables,cointegrationanalysisismoreappropriatecomparedtotheVARmodelbecausethecointegrationmethodcanexplorethedynamicco-movementsamongthevariables(MukherjeeandNaka,1995).
Cointegrationisamethodofdefiningthelong-termrelationshipamongagroupoftimeseriesvariables.
Itusestheideaofintegratedtimeseriesindescribingthelongruninteractionandaroseinthecontextofthespuriousregressionproblem.
Toberelatedtooneanotherstatisticallyinthelongrun,variablesmustbeofthesameorderofintegration.
Thepresenceofcointegrationamongrelevantvariablesimpliesthatalinearcombinationofnon-stationarytimeseriesvariablesisstationary.
Cointegrationreferstoalinearcombinationofnon-stationarytimeseriesthatresultinastationarytimeseriesinthepresenceofcointegrationamongthevariables(Granger,1986).
8TheJohansen's(1991)vectorerrorcorrectionmodelyieldsmoreefficientestimatorsofcointegratedvectorscomparedtoEngleandGrangercointegrationtests.
aJohansen(1991)developedthevectorerrorcorrectionmodelas:∑=++Γ+=11kjtktjtjtYYYεαβ(1)whereisafirstdifferencenotation,jtYis1*pvectorintegratedoforderone;is1*pconstantvectorrepresentingalineartrendinasystem,kisalagstructure;tεis1*pGaussianwhitenoiseresidualvector;Γjispp*matrixindicatingshort-termadjustmentsamongvariablescrosspequationsatthejthlag;αisrp*speedofadjustment;βisrp*cointegratingvectors.
Alongtermequilibriumrelationship(stationarylinearcominbationsofβ'Υt-k)isfoundwhenvariablearecointegratedevenifYtisnon-stationary.
Asevidentfromequationabove,inthepresenceofcointegration,aVARinfirstdifferencesismisspecified,asitomitstheerrorcorrectionterm(αβ'Υt-k)andthusoverlooksthelong-termequilibriumrelation(Johansen,1988).
WefirstexaminethestationarityofallthevariablesusingtheaugmentedDickey-Fullerunitroottesttoinsurethattheregressionresultsobtainedarerobust.
bTheapplicationofJohansenlikelihoodratioteststhenumberofcointegrationvectors(r):thetracetestandthemaximumEigenvaluetest.
Thetracestatisticsteststhenullhypothesisofr=0(i.
e.
nocointegration)againstthealternativethatr>0(i.
e.
thereisoneormorecointegrationvectors).
ThemaximumEigenvaluestatisticstestthenullhypothesisthatthenumberofcointegratingvectorsisragainstthespecificalternativeofr+1cointegratingvectors.
Ifallthevariablesarenotstationaryintheformofaunitroot,thefirstorderdifferenceshouldbeusedinthemodelingprocedure.
Wethencheckforcointegrationintermsofstockpricesandmacroeconomicvariables.
Ifcointegrationexistsamongallvariables,anerrorcorrectiontermshouldbeaddedtotheestimationprocedure(EngleandGranger,1987).
aThisisbecausetheJohansen's(1991)VECMisafullinformationmaximumlikelihoodestimationmodel,whichallowsfortestingcointegrationinawholesystemofequationsinonestep,withoutrequiringaspecificvariabletobenormalized.
bTheoptimallaglengthdeterminedbytheAkaikeInformationCriterion(AIC),theSchwarzBayesianCriterion(SBC)andtheHannan-QuinnCriterion(HQC).
9Weestablishamodelusingthevectorerrorcorrectionmodelwhichisstatedinthefollowingequations.
BothequationsbelowaimtoestimatethecointegratedvectorusingChinesedataalongwiththeUSdataasfollows:trrtttttttttttUSIRUSSIRUSCCIUSIPDJIAERIRLIRSIRIPCPISCIεβββββββββββα++++++++++++=1110987654321(2)nt.
.
.
.
.
1=whereSCIistheShanghaicompositeindex,αistheconstant,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-terminterestrate,LIRislong-terminterestrate,ERisexchangerate,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction,USCCIistheUSconsumerconfidenceindex,USSIRistheUS3-monthsTreasurybillyield,USLIRistheUS20yearsmaturitybondsyield.
3.
2GrangerCausalityTestGranger(1969)proposesamethodofdescribingtherelationshipbetweentwo(ormore)variablesinordertoobservethedirectionofcausality.
Considerthevariables:tXandtY,theGranger-causalitytestcanbeappliedasfollows:∑∑==++=piqjtjtjtitXYY111βα(3)Therestrictedmodelistherefore:∑=+=pittitYY11να(4)wheretandtνarewhitenoise,pistheorderoflagY,andqistheorderoflagX.
Thenullhypothesisforequation(5)is:∑===qjjH100β(5)suggestingthatthelagtermsjtXdoesnotGrangercausetYintheregression.
ThehypothesesaretestedusinganFtest.
103.
3DataWeselectsevendomesticmacroeconomicvariablesandfiveinternationalmacroeconomicvariablesbasedontheirhypothesizedeffectoneitherthecashflowsortherequiredrateofreturn.
ThedefinitionofthevariablesusedtoproxytheChinesestockmarketandthemacroeconomicvariablesareprovidedinTable1.
Table1DefinitionofvariablesVariableDefinitionShanghaiCompositeIndex(SCI)Indexofmarket-value-weightedaverageofmonthlyclosingpricesforallshareslistedontheShanghaiStockExchangeInflation(CPI)ConsumerpriceindexIndustrialProduction(IP)SeasonallyadjustedindustrialproductionindexMoneysupply(M1)NarrowlydefinedmoneysupplyShortterminterestrate(SIR)One-yeartimedepositratesetbythecentralbankLongterminterestrate(LIR)Five-yeartimedepositratesetbythecentralbankExchangerate(ER)End-of-monthpriceofU.
S.
dollarintermsofChineseYuanChineseexports(EXPORT)MonthlyChineseexportsDowJonesIndustrialAverage(DJIA)MonthlyclosingindexofDowJonesIndustrialAverageU.
S.
industrialproduction(USIP)USseasonallyadjustedindustrialproductionindexU.
S.
Consumerconfidenceindex(USCCI)MonthlyindexoftheUShouseholdsurveyofconsumer'sopinionsoncurrentconditionsandfutureexpectationsoftheeconomyU.
S.
shortterminterestrate(USSIR)USthreemonthstreasurybillyieldU.
S.
longterminterestrate(USLIR)End-of-montharithmeticaveragesyieldtomaturityoftheUSbondswith20yearstomaturityTable2providesthedescriptivestatisticsofthevariables.
Thedataintable2areinlevels,andtable3belowshowsthedatainfirstdifferences.
Thesampleperiodconsistsof204observations.
ThestartingdateistheearliestdateforwhichtheinformationoftheShanghaiA-shareindexavailableinDataStream.
WeselecttheShanghaiStockCompositeindex,DowJonesIndustrialAverageasthestockpriceindexesforChinaandtheUSrespectively.
Thisstudyfocusesonthemainland11ChinesestockmarketandconsiderstheShanghaiCompositeIndex(SCI)becauseofitssizeandmarketvalue.
Wechoosetheindustrialproduction,consumerconfidenceindex,short-terminterestrateandlong-termbondyieldasproxiesforinternationalmacroeconomicactivitiesintheUS.
Wechosetheconsumerconfidenceindexoverprivateconsumptionbecausetheconsumerconfidenceindexissurveyedonamonthlybasis.
Table2DescriptiveStatisticsofAllVariables:January1992toDecember2008VariableObservationMeanStandardDeviationMinMaxlog_SCI2047.
2260.
5465.
7478.
741log_CPI2044.
6550.
0644.
5834.
850log_IP2042.
6820.
1452.
4743.
099log_M12046.
3690.
7625.
0857.
798log_SIR2041.
0090.
4820.
5361.
896log_LIR2041.
6840.
5991.
0262.
629log_ER2042.
0530.
1271.
6882.
164log_EXPORT2045.
4880.
8973.
5147.
220log_DJIA2048.
9520.
4468.
0789.
542log_USIP2044.
5440.
1454.
2304.
722log_USCCI2044.
570.
2763.
6534.
975log_USSIR2041.
150.
741-4.
6051.
852log_USLIR2041.
7490.
1681.
1572.
104Notes:logmeansallseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-teminterestrate,LIRislong-terminterestrate,ERisexchangerate,EXPORTisChineseexports,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction,USCCIistheUSconsumerconfidenceindex,USSIRistheUS3-monthsTreasurybillyield,USLIRistheUS20yearsmaturitybondsyield.
FromTable2,thestandarddeviationofShanghaiCompositeIndexandDowJonesare0.
546and0.
446respectively.
ItcanbeobservedthattheChinesestockmarketpossesseshighervolatilitythantheUS.
ThishighvolatilitycanattributedtoexcessivespeculationinChina.
12Table3SummaryStatisticsofTimeSeriesTransformationVariableObservationsMeanStandardDeviationMinMaxlog[SCIt-SCIt-1]2030.
0090.
153-0.
3811.
063log[IPt-IPt-1]203-0.
0010.
049-0.
3770.
160log[M1t-M1t-1]2030.
0130.
041-0.
4350.
103log[ERt-1-ERt-1]2030.
0010.
029-0.
0160.
405log[DJIAt-DJIAt-1]2030.
0050.
042-0.
1640.
101log[USIPt-USIPt-1]2030.
0020.
006-0.
0400.
021Notes:meansalldataareinfirstdifference,logmeansallseriesareinnaturallogarithms,tiscurrentperiod,t-1ispreviousperiod,SCIisShanghaicompositeindex,IPisindustrialproduction,M1ismoneysupply,ERisexchangerate,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction.
TableA1providestheeconomicinterpretationofthefirstdifferenceinthelogarithmoftheselectedvariables.
a4.
ResultsTable3revealsthatovertheperiodstudied,theShanghaiCompositeIndex(SCI)grewatanimpressiverateof0.
9%permonthcomparedtotheDowJonesIndustrialAverage(DJIA)at0.
5%.
ThemonthlygrowthrateofmoneysupplyishigherthanthegrowthrateoftheChinesestockindex,atarateof1.
3%.
ThisresultsupportsKraftandKraft(1977)whoarguethatanincreaseinthemoneysupplyprovidesexcessliquidityforstockpurchases.
TheChineseindustrialproductiongrewatrelativelylowratecomparedtotheUS.
4.
1.
UnitRootTestThefirststageoftheanalysisistodetermineifthetimeseriesdataisnon-stationarybyusingtheAugmentedDickey-Fuller(ADF)test.
TheappropriatelaglengthsofeachindividualvariablehavetobedeterminedbeforetheADFtest(seeTableA2intheappendix).
Thenullhypothesisstatesthateachtimeseriescontainsaunitrootthatcannotberejectedforallvariables.
TheAugmentedDickey-FullerresultsareshowninTable4below,andshowthatthenullhypothesisofaunitrootcannotberejectedforallvariablesatthe5%levelexceptChineseexports(log_EXPORTS).
Therefore,itisconcludedthatalltimeseriesexceptChineseexports(log_EXPORTS)underinvestigationfollowanI(1)processandcointegrationtestscannowbeapplied.
aSeeappendixfortableA1.
13Table4UnitRootTest4.
2.
MultivariateCointegrationTestInthesecondstage,wepresenttheJohansencointegratingestimatesbetweenChinesestockpricesandbothdomesticandtheUSmacroeconomicvariables.
Table5showstheJohansen-Juseliuscointegrationtestresultsbasedonthetracestatistics(λtrace)andmaximumeigenvalues(λmax).
VECMinvolvesfirstdifferencesanderrorcorrectionterms,sothattherearetwolags.
ThelaglengthsarechosensothattheerrorsoftheVECMarenotcorrelated.
VariablesADFTestStatistics5%CriticalvalueStationaryornotlog_SCI-3.
416-3.
437Nolog_CPI-1.
797-3.
437Nolog_IP-2.
285-3.
437Nolog_M1-3.
191-3.
437Nolog_SIR-2.
229-3.
437Nolog_LIR-1.
645-3.
437Nolog_ER-2.
294-3.
437Nolog_EXPORT-3.
59-3.
437Yeslog_DJIA-0.
205-3.
437Nolog_USIP0.
981-3.
437Nolog_USCCI-0.
66-3.
437Nolog_USGILL3-0.
109-3.
437Nolog_USIR-2.
492-3.
437NoNotes:Allseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-teminterestrate,LIRislong-terminterestrate,ERisexchangerate,EXPORTisChineseexports,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction,USCCIistheUSconsumerconfidenceindex,USSIRistheUS3-monthsTreasurybillyield,USLIRistheUS20yearsmaturitybondsyield.
14Table5JohansenCointegrationRankTest(USmacroeconomicvariables)AcointegrationanalysisisappliedinordertomodelthelongrunequilibriumrelationshipbetweenChinesestockpricesandmacroeconomicvariables.
Werejectthenullhypothesisofnocointegratingequilibriumatthe5%level.
Basedonthedata,morethanonecointegratingvectorsamongstockprices,industrialproduction,consumerpriceindex,moneysupply,bothshortandlong-terminterestrate,exchangerate,andinternationalmacroeconomicvariablesexist.
WethenproceedtoestimatetheVECMmodel.
Inthepresenceofmorethanonecointegratingvector,JohansenandJuliusconsiderthefirsteigenvectortobethemostuseful.
Thecorrespondingvectoristhus:=1β(26.
48-68.
76-25.
22-2.
910.
61-67.
88-5.
6916.
06-4.
770.
43-2.
79200.
25).
ThesevaluesrepresentthecoefficientsforSCI(normalizedto1),andtheycanbeinterpretedaslong-termelasticitymeasuresduetologarithmictransformation.
Thevectorthencanbeexpressedas(Table6):ChinesestockpricesandbothdomesticandUSmacroeconomicvariables,1992.
1-2008.
12(Johansencointegrationranktest)H0Eigenvalue(λmax)Tracestatistic(λtrace)5%criticalvaluer=0464.
1832﹡277.
71r=10.
44209346.
3057﹡233.
13r=20.
35859256.
6002﹡192.
89r=30.
29168186.
9378﹡156r=40.
2401131.
4762﹡124.
24r=50.
1868589.
694794.
15Notes:=thenumberofcointegratingvectors.
*denotesthestatisticsaresignificantat5%level.
15Table6JohansenCointegrationTest(USmacroeconomicvariables)Giventheevidenceinfavorofatleastonecointegratingvector,wenormalizethecointegratingvectoronthestockpriceandfindsignificantpositivecoefficientsonindustrialproduction;short-terminterestrate,moneysupplyandexchangerate(seeTable6).
Table6alsoshowsthatthestockpriceisnegativelyrelatedtoinflation.
However,long-terminterestratehasnosignificantimpactontheChinesestockindex.
TheerrorcorrectionmodelshowsthattheShanghaiCompositeIndex,inflation,industrialproduction,moneysupply,short-terminterestrateandexchangerateallcontributetotheerrorcorrectionprocess.
TheresultsusingChinesedataarepartiallyconsistentwiththeexistingliteratureandevidence.
Asexpectedwefindapositiverelationshipbetweenindustrialproductionandthestockprices.
FamaandSchwet(1977)andGeskeandRoll(1983)findapositiverelationshipbetweenstockpricesandindustrialproduction.
Wefindthattheinflation(CPI)hasanegativeimpactonstockprices,whichisalsoconsistentwithotherstudies(Chen,RollandRoss1986,MukherjeeandNaka1995).
SinceVariableCoefficientStandardDeviationlog_SCI1log_CPI-26.
48296*5.
41log_IP68.
76021*6.
007log_M125.
21913*7.
605log_SIR2.
911015*1.
076log_LIR-0.
60814460.
815log_ER67.
87856*6.
811log_DJIA5.
685336*2.
223log_USIP-16.
05585*7.
692log_USCCI4.
766522*1.
407log_USGILL3-0.
4300350.
457log_USLIR2.
7907881.
932_cons-200.
2474Notes:Allseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-teminterestrate,LIRislong-terminterestrate,ERisexchangerate,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction,USCCIistheUSconsumerconfidenceindex,USGILL3istheUS3-monthsTreasurybillyield,USLIRistheUS20yearsmaturitybondsyield.
*denotesthestatisticsaresignificantat5%level.
16genuineinflationislikelytobedistortedbyfinancialrepression,anincreaseinChineseinflationmaystillplaytheroletochangetheexpectationofinvestors'requiredrateofreturnbyincreasingthenominalrisk-freerateaswellasthediscountrate.
Theeffectofmoneysupplyonstockpricesisfoundtobesignificantlypositive,whichisconsistentwiththeliterature.
MukherjeeandNaka(1995)alsofindapositiverelationshipbetweenstockpriceandmoneysupplyinJapan.
Short-terminterestrateshaveasignificantpositiveimpactonChinesestockprices,whichisconsistentwithMukherjeeandNaka(1995).
However,long-terminterestratesarenotsignificant.
Apossibleexplanationforthisresultisthatlong-terminterestratesdonotserveasproxyforthenominalrisk-freecomponentusedinthediscountrateinthestockvaluationmodels.
TheexcessivevolatilityofChinesestockpricesperhapscancelsoutthesensitivityofmarketreactiontowardslong-terminterestrate.
LiuandShrestha(2008)applytheJohansen'scointegrationtestanddonotfindsignificantrelationshipsbetweenChinesestockpricesandbothshortandlong-terminterestrates.
TherelationshipbetweentheChinesestockpricesandtheexchangerateispositive.
ThisissimilartothefindingsofMaysamiandKoh(2000),suggestingthatahighvolumeoftrade(importsandexports)intheChineseeconomyprovidesastrongerdomesticcurrency,whichlowersthecostofimportedinputsandallowsdomesticproducerstobemorecompetitiveinternationally.
Sinceweareinterestedintherelationshipbetweenstockprices,domesticvariablesandinternationalvariables,weaddedtheUSstockprices(DJIA),industrialproduction(IP),theUSconsumerconfidenceindex;3-monthTreasurybillandUSlong-termbondyieldthesefivevariablesandtestthecointegratingrelationships.
Accordingtotable6,theChinesestockpriceshaveasignificantpositiverelationshipwiththeDowJonesIndustrialAverageandtheUSconsumerconfidenceindex.
TheUSindustrialproductionpresentsanegativerelationshipwiththeChinesestockindex.
Boththe3-monthTreasurybillandbondyields,however,areinsignificant.
Thenumberofcointegratingrelationshipsinmostcasesissimilar,moreimportantly,thedomesticvariablespossesssimilarsignsandcoefficientstotheresultsreported,hencetheresultsarerobusttotheadditionofinternationalvariables.
TheresultsindicatethattheDowJonesIndexissignificantlyrelatedtoChinesestockprices.
OurfindingsareconsistentwithTian(2007);anincreaseintheUSindustrialproductionsignificantlyaffectsstockpricemovementsinChina.
TheUSconsumerconfidenceindexhasasignificantandpositiveimpactonChinesestock17prices,whichisconsistentwiththeliterature.
Clearly,anincreaseoftheUSconsumerexpenditurewillleadtogreatercashflow,hencehigherstockpricesforChinesecompanies.
Accordingtothetable6,bothshortandlong-termUSinterestrateshaveinsignificantimpactsonChinesestockprices.
ThisisnotconsistentwithNassehandStrauss(2000)whofindapositiverelationshipbetweenGermaninterestratesandfourEuropeanstockmarkets.
ThisisperhapscausedthefactthatChineseinterestratesdonotaffectthediscountrate,hencethestockprices.
4.
3Granger-CausalityTestTheGranger-causalitytestisconductedtostudythelead-lagrelationshipsbetweenthemacroeconomicvariablesandtheShanghaiCompositeIndex.
Theresultsarereportedintable7.
TheyindicatethattheShanghaiCompositeIndexGrangercausesinflation,moneysupply,bothshortandlong-terminterestrateaswellasChineseexportsinthesampleperiod.
ThissuggeststhattheShanghaiCompositeIndexisaleadingindicatorforeconomicvariablesinChina,whichisconsistentwithempiricalresultsconductedintheUS(Fama,1991).
Arationalexplanationisthattheratioofcapitalizationofthestockmarkettogrossdomesticproduct(GDP)inChinaisconsiderablylarge,therefore,theimpactofcapitalmarketonthewholeeconomyisalsohigh.
18Table7Granger-Causality:Test1Table8Granger-Causality:Test2H0LagF-statisticP-valueRejectH0orNotLog_SCIdoesnotGrangerCauseLog_CPI322.
690.
00YesLog_SCIdoesnotGrangerCauseLog_IP31.
030.
38NoLog_SCIdoesnotGrangerCauseLog_M11357.
080.
00YesLog_SCIdoesnotGrangerCauseLog_SIR423.
770.
00YesLog_SCIdoesnotGrangerCauseLog_LIR1110.
150.
00YesLog_SCIdoesnotGrangerCauseLog_ER11.
450.
23NoLog_SCIdoesnotGrangerCauseLog_EXPORTS460.
090.
00YesLog_SCIdoesnotGrangerCauseLog_DJIA10.
472520.
40NoNotes:Allseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-teminterestrate,LIRislong-terminterestrate,ERisexchangerate,DJIAisDowJonesIndustrialAverage.
H0isnullhypothesisofGranger-Causalitytest.
Lagislaglength.
H0LagF-statisticPvalueRejectH0orNotLog_DJIAdoesnotGrangerCauseLog_SCI1359.
540.
00YesNotes:Allseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,DJIAisDowJonesIndustrialAverage.
H0isnullhypothesisofGranger-Causalitytest.
Lagislaglength.
19Accordingtotable8,byapplyingtheGrangercausalitytest,log_DJIAdoesGrangercauselog_SCI.
TheresultsuggeststhatthestockpricechangesintheUScanbeusedtopredicttheChinesestockmarket.
ThefindingisconsistentwithLaurenceet.
al.
(1997).
TheyalsofindastrongcausaleffectfromtheUSstockmarkettoChinesestockmarkets.
5.
ConclusionThispaperexaminedtherelationshipsbetweentheShanghaiCompositeIndexandasetofmacroeconomicvariablesfortheperiodofJanuary1992toDecember2008.
ThetimeseriesdatasetemployedinthisstudyincludesmonthlyobservationsoftheShanghaiCompositeIndex(SCI),industrialproduction(IP),theinflationrate(CPI),narrowlydefinedmoneysupply(M1),bothshortandlong-terminterestrate(SIR,LIR),andtheexchangerate(ER).
ThestudyincludesUSmacroeconomicvariablesaswellastheirstockmarketindices.
WusetheJohansenmultivariatecointegrationteststoexaminewhethertheChinesestockmarketiscointegratedwithasetofmacroeconomicvariablesinthelongrun.
WealsoexaminewhethertheChinesestockmarketisaleadingindictorforeconomicvariablesbyemployingGranger-causalitytests.
ByemployingtheJohansen(1991)cointegrationanalysis,wefindthatalong-termrelationshipexistsbetweenstockpricesandthemacroeconomicvariables.
Whiletheindustrialproduction,moneysupply,shortterminterestrateandtheexchangeratearepositivelyrelatedtoChinesestockprices,inflationisnegativelyrelated.
ThisstudyshowsthattheChinesestockmarketdoesreacttochangesinthemacroeconomicvariablesinthelongrun,despiteitshighdegreeofspeculation,immaturityandshort-termvolatility.
However,long-terminterestratesareinsignificant.
Apossibleexplanationforthisresultisthatlong-terminterestratesdonotserveasproxyforthenominalrisk-freecomponentusedinthediscountrateinthestockvaluationmodels.
Thispaperhasmadecontributionstotheliteratureonthelong-termrelationshipsbetweenChinesestockpricesandinternationalmacroeconomicvariables,particularly,theUSmacroeconomicvariables.
Thecointegrationequationsarerobusttotheadditionofinternationalvariables,suggestingthattheChinesestockmarketisalsosensitivetotheUSmacroeconomicfactors,namely,DowJonesstockindex,theUS20industrialproductionandconsumerconfidenceindex.
TheDowJonesIndustrialAverage(DJIA)andtheUSconsumerconfidenceindexhavepositiveimpactsontheChinesestockprices;theUSindustrialproductionpresentsanegativeimpact.
TheimplicationisthattheChinesestockmarketswillbecomemoreintegratedwiththeUSstockmarketsastheChinesemacroeconomicactivitybecomesincreasinglyintegratedthroughtrade.
Finally,theGranger(1969)causalitytestsindicatesstatisticallysignificantrelationshipsbetweenChinesestockpricesandinflation,moneysupply,bothshortandlong-terminterestratesandChineseexports.
TheresultshowsthattheShanghaiCompositeIndexisaleadingindicatorformacroeconomicvariablesinChina.
TheresultsalsoshowthattheDowJonesGranger-causestheShanghaiCompositeIndexsuggestingthatchangesoftheUSstockindexcanbeusedtopredictChinesestockmarket.
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24AppendixTableA1TimeSeriesTransformationVariablesDefinitionlog[SCIt-SCIt-1]ReturnontheSCIlog[IPt-IPt-1]Growthrateofindustrialproductionlog[M1t-M1t-1]Growthrateofmoneysupplylog[ERt-ERt-1]Changesinexchangeratelog[DJIAt-DJIAt-1]ReturnontheDowJonesIndustrialAveragelog[USIPt-USIPt-1]GrowthrateofUSindustrialproductionNotes:meansallseriesareinfirstdifferenceform,logmeansallseriesareinnaturallogarithms,tiscurrentperiod,t-1ispreviousperiod,SCIisShanghaicompositeindex,IPisindustrialproduction,M1ismoneysupply,ERisexchangerate,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction.
.
TableA2LaglengthsofvariableVariablelagLLAICHQCSBClog_SCI0-152.
11.
5311.
537681.
5475194.
8962*-0.
92896*-0.
91561*-0.
89598*295.
551-0.
92555-0.
90553-0.
97608396.
1985-0.
92199-0.
89529-0.
85602496.
1986-0.
91199-0.
87862-0.
82953Log_SCI=ShanghaiCompositeIndex,lag=laglength,LL=Maximizedlog-likelihood,AIC=AkaikeInformationCriterion,HQC=Hannan-QuinnCriterion,SBC=SchwarzBayesianCriterion,"*"denotesAIC,HQCandSBCareallminimisedatalaglengthof1.
Variablelaglog_SCI1log_CPI3log_IP3log_M11log_SIR4log_LIR1log_ER1log_EXPORT4log_DJIA1log_USIP4log_USCCI1log_USGILL34log_USLIR325Notes:logmeansallseriesareinnaturallogarithms.
SCIisShanghaicompositeindex,CPIisconsumerpriceindex,IPisindustrialproduction,M1ismoneysupply,SIRisshort-teminterestrate,LIRislong-terminterestrate,ERisexchangerate,EXPORTisChineseexports,DJIAisDowJonesIndustrialAverage,USIPistheUSindustrialproduction,USCCIistheUSconsumerconfidenceindex,USSIRistheUS3-monthsTreasurybillyield,USLIRistheUS20yearsmaturitybondsyield.
Lagislaglength.
26
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