The Research of the Correlation between Stock Market and Macroeconomy Based on Comparison of Chinese and American Stock Markets

Transcription

1 Economic Management Journal December 2018, Volume 7 Issue 2, PP The Research of the Correlation between Stock Market and Macroeconomy Based on Comparison of Chinese and American Stock Markets Yuzhang Su SHU-UTS SILC Business School, Shanghai University, , China sugarsu14@163.com Abstract Since 2008, the economic volume of the United States has gradually decreased from 30% of world GDP to 20%-25%, and China has risen from 7% to 15%. However, face at a fast-growing economy, China's stock market has been sluggish, contrast strongly to the US's thriving stock market. This paper studies the correlation between stock market and macroeconomy, based on the perspective of stock market and macroeconomy between China and the United States. This article takes China and the United States from 1999 to early 2017 as the time frame. Choosing the Shanghai Stock Exchange securities market, the S&P 500 index and the macroeconomy indicators and policies of China and the United States as research objects, using a comparative method to study the interactive relationship between the two major economies. In addition, this paper analyzes the parts of macroeconomy and microlisted companies in economic and financial theory, and innovatively applies the four different aspects of macroeconomy of total seven indicators to more fully represent the macroeconomy. This paper establishes the VAR model, impulsive response, and variance decomposition to explore the interaction between trends of the stock market and macroeconomic trends. The research results show that the stock market trend is positively related to the macroeconomic trend. China's stock market is greatly affected by capital, and the reason why the US stock market can develop better under the condition that the macroeconomic development is not as good as China's, because of the unique status of the US dollar. Finally, this paper combines descriptive analysis and empirical analysis results to propose policy recommendations for China's stock market and macroeconomic development. Keywords: Stock Market; Macroeconomy; VAR Model; Impulsive Response; Variance Decomposition 1 INTRODUCTION Since the twentieth century, the US GDP has been positively correlated with the Dow Jones index. Although China's economy has developed more rapidly, while after the outbreak of the financial crisis, China's macroeconomic developing trend is not related to the stock market index. Why the stock market trend and the macroeconomic trend will be greatly deviated in China has become a topic which is worth of studying. Furthermore, re-examining the correlation between the stock market and macroeconomic development of China and the United States will help to explore appropriate growth paths in the process of developing China's economy and finance. This paper divides the macroeconomic factors which are affecting the stock market into four categories, including: economic factors, monetary factors, inflation factors, and policy factors. For the first three factors, this paper establishes a VAR model for empirical analysis. Based on the macroeconomic indicators of the National Bureau of Statistics, it selects seven indicators in four aspects that may be related to the stock market, and uses principal component analysis to construct the factor instead of the original indicator. To avoid the decrease in the reliability of the results caused by multicollinearity. For the policy factors, this article uses descriptive analysis to explain this, and comprehensively analyzes the correlation between the stock market and the macroeconomy in four perspectives. This paper analyzes the perfection of China's stock market and the possible shortcomings by comparing the performance of the two stock markets in different economic environments, and at the same time accumulate examples

2 and experience for future development. This paper adopts cointegration test and Granger causality test to test the correlation between stock market and macroeconomy, and establishes vector autoregressive model (VAR), impulsive response and variance decomposition to analyze the degree of mutual promotion between macroeconomy and stock market. Generally, institutions, policies, and structures are factors that cause changes in the relationship between stock market prices and macroeconomic indicators. In a narrow sense, stock market prices and macroeconomic indicators are the correlation factors of both side impaction. 2 RELATED LITERATURE The question of the correlation between the stock market and the macroeconomy should be viewed into two perspectives. First of all, there are a lot of papers about the impact of the stock market on the macroeconomy. The literature has been conclusive: the stock market is conducive to economic development and precedes GDP growth. Gallegati (2008) used wavelet analysis to analyze the relationship between the Dow Jones index and the US macroeconomy from 1996 to The results show that the stock market can predict the trends of future economic, which stock market trends are positively correlated with economic trends. [1]. Atje and Jovanovic (1993) used a least squares estimation regression for data from 1970 to 1988 in a total of 40 countries. The study found that for every 1% increase in stock market liquidity, GDP growth rate would increase by 0.08% [2]. The existing literature on the impact of macroeconomy on the stock market can be summarized as: economic factors, monetary policy, exchange rates and policies. The economic factors and the general expansionary monetary policy have positive effects on the stock market. Chen Qi'an (2010) used the GARCH model to analyze and verify the correlation between China's macroeconomic factors and the stock market index from 2000 to The results show that the changes in monetary policy can significantly affect the stock market price fluctuations, and there is a positive correlation between them [3]. Zhang Baoyin and Wu Zhengji (2014) used the CARMA model to study the impact of macroeconomy on stock market volatility. The results show that there is a significant correlation between stock market trends and macroeconomy, in terms of money supply and consumption. Macroeconomy has a strong influence on stocks [4]. Li Yang (2014) analysis found that China's stock market system and policy dominating the fluctuation of China's stock market, so China's stock market trend still deviates from the economic trend. There is still a lack of research on this issue to look at the impact of macroeconomy on the stock market from a more comprehensive perspective. The impact of macroeconomy on the stock market should be considered as a whole rather than being separated into different macroeconomic indicators [5]. For the correlation between stock market trends and macroeconomic trends, most of the existing literature believes that stock market trends and macroeconomic trends in a mature market. However, this international empirical evidence has only a small number of studies in China that lead to a significant correlation between the two. Li Xing (2013) studies the scale of stock market, liquidity of stock market, and the ratio of long-term investment in fixed assets. The results show that there is always a positive correlation between stock market trend and macroeconomic growth in any period of time [6]. Choietal (2000) used the error correction model to analyze the data of seven countries including United States, and studied the relationship between stock return ratio and industrial production index. The results show that except for France and Italy, there are positive correlation between both stock market trends and macroeconomic trends. At the same time, many existing studies have shown that the correlation between macroeconomy and the stock market is weak or even non-existent. Xue Hualin (2014) empirically found that the correlation between China's stock market cycle and macroeconomic cycle is less than 40% from the perspective of macroeconomic cycle and stock market cycle, while the United States is 70%. Therefore, China's stock market and macroeconomic correlation are weak. [7]. Yang Qiao (2013) used the quarterly data from 2007 to 2012 and found that there is no significant cointegration relationship between the Shanghai Composite Index and GDP, and the trend of the stock market can not predict the macroeconomic trend. The reason may be that the stock market in China is too young. Severe policy influence and single choice of explanatory variables [8]. In summary, the existing literature on the impact of the stock market on the macro-economy, the impact of the macroeconomy on the stock market, and the relevance of the both sides have made a reasonable explanation. However, there are still two main shortcomings in the overall view. Firstly, the selection of macroeconomic indicators in the

3 existing literature is too simplistic and homogenized. Secondly, national policies significantly affect the macroeconomic changes in a country, and its changes are difficult to summarize by indicators. Therefore, study deeply the correlation between the Chinese and American stock markets and the macroeconomy can draw lessons from experience, thus improving China's financial economic development. 3 THEORY AND MODEL DESIGN 3.1 Introduction of Theory Traditional stock pricing theory often uses the present value of expected future cash flows to measure the intrinsic investment value of stocks. From the Gordon dividend growth model, stock prices are at least related to economic growth rates, inflation rates, and interest rates. Secondly, modern stock pricing theory analyzes the balance between income and risk from the perspective of stock portfolio. According to the capital asset pricing model, the stock return rate is related to the bank deposit interest rate and the national debt interest rate. At the same time, both the consumption investment and the exchange rate of a country will have an impact on the macroeconomy. Macroeconomic growth is directly related to stock market listed companies in the micro-field. Therefore, from a macroeconomic point of view, both consumer investment and exchange rates will affect stock prices. 3.2 Experimental design Above all, according to the main performance of the relevant impact mechanism between the stock market and the macroeconomy, combined with the impact mechanism of China's macroeconomy on stock market volatility. Then concludes the existing literature, this paper proposing the following assumptions: Hypothesis 1: The stock market and the macroeconomy are positively correlated. Hypothesis 2: The quantifiable parts of the stock market and macroeconomic correlation are: economic factors, inflation factors, monetary factors, and financial factors. The impact of economic growth on the stock market is significant: Gallegati's (2008) study suggests that stock market movements are positively correlated with economic trends. Li Xing (2013) empirical research found that there is always a positive correlation between China's stock market trend and macroeconomic growth. Combined with specific research, since the stock market directly serves the real economy. when the real economy grows, the stock dividends and profit expectations will inevitably rise. Then the value of the stock will increase, and the stock market trend will also rise. This paper proposes another hypothesis: Hypothesis 3: The stock market trend is positively related to economic growth. Since the trading volume and market value of the Shanghai Stock Exchange occupy the majority of the A-share market, the SZZS can better measure the development of China's stock market. Therefore, this paper chooses to use the monthly closing price data of the Shanghai Composite Index. Since the S&P 500 (BP500) index is a newly compiled index, the weighting method is more scientific than other indexes. And it also represents a relatively large market value. Therefore, this paper chooses the S&P 500 index. According to the actual situation of China's economic development, this paper selects four aspects of the analysis of macroeconomics, 9 representative indicators. Though namely economic factors: industrial added value, asset investment, total retail sales. Inflation factors: consumer price index, production price index; currency factors: M1, M2. Financial factors: exchange rate, interest rate. Including: (1) Consumer Price Index (CPI): an indicator that measures the cost of living for a given period of time. (2) Producer Price Index (PPI): an indicator that measures production prices for a given period of time. (3) Industrial devaluation (GYZJ): an indicator for measuring the rate of industrial growth in a given period. Since the GDP index is quarterly data, this paper selects the industrial value added as an indicator of the level of macroeconomic growth. (4) Fixed Asset Investment (INVEST): an indicator for measuring the speed of industrial development in a certain period. (5) Money supply (M1 and M2): an important indicator reflecting the monetary policy of the monetary authorities, which is mainly based on macroeconomic levels

4 and development trends. (6) Exchange rate (ER): the ratio of local currency to foreign currency is affected by international capital flows. (7) Total retail sales (CR): the sum of retail sales of consumer goods sold directly by urban and rural residents and social groups by all walks of life. (8) Interest rate (I): interest rate affects risk-free income and discount rate, which is directly linked to stock price. 4 ANALYSIS AND EXPERIMENTATION - THE CORRELATION BETWEEN STOCK MARKET AND MACROECONOMY 4.1 Chinese and American Stock Market and Macroeconomic Correlation and Particularity The mature stock market can be used as a barometer of the macroeconomy. The trend of the stock market is related to the macroeconomy and is ahead half a year to one year. There are three basic conditions: firstly, the total market value is higher than GDP; secondly, the integrity of the industry is maintained at a relatively high level; thirdly, the mechanism of the stock market is mature. Throughout China's stock market trend and macroeconomic development in the past 30 years, before the equity split was reformed in 2005, the trend of the stock market was basically opposite to that of the macro economy. After 2005, the sharp increase in the total market value and the increasingly perfect market system made China's stock market trend basically positively related to the growth rate of the macro economy. The influence of the original monetary policy was greatly reduced. After 2015, the overall size of China's stock market has been greatly improved, and the ratio of total market capitalization to GDP has increased from the previous 40% to 70%. A large number of inferior listed companies were punished, high-quality new shares continued to enter, and the overall quality of the stock market and industry integrity increased significantly. In this mature market in the United States, the S&P 500 index is basically positively correlated with GDP growth, and there is less divergence between the two phases. Behind the stable relationship between the two includes the particularity of the US economy. With the Bretton Woods system, the value of the US dollar far exceeds that of other currencies. The depreciation of the US dollar can be passed on to investors holding US currency and national debt. Therefore, when the domestic economy is difficult, a large amount of printing money will not have a huge inflationary impact. 4.2 Empirical Analysis Descriptive Analysis of the Correlation between Stock Market and Macroeconomy Investigating the average of China's stock market and macroeconomic variables, the growth rate of stock market returns with CPI and PPI are basically an order of magnitude. Industrial added value, industrial investment, consumer retail, interest rate and money supply are an order of magnitude higher, and the increasing of exchange rate is minimal. This shows that when the exchange rate is stable, China's economic growth rate far exceeds the rate of inflation, and the macroeconomic growth rate far exceeds the growth rate of the stock market. The normal distribution test rejects the normal distribution relationship between industrial added value and industrial investment. The Chinese New Year holiday makes the data itself seasonal. Descriptive statistics for each variable are shown in the Table 1. Table 1 Descriptive statistics analysis of China s stock market and macroeconomic variables SZZS CPI PPI GYZJ INVEST M1 M2 EX CR I Average Median E Max Min Std value

5 Deflection Kurtosis JB P-value From the analysis of various indicators in the United States, we can find that other indicators besides exchange rate and interest rate are basically in the same order of magnitude. For the United States, its macroeconomic growth rate is matched with the development speed of the stock market, which proves the correlation between the stock market and the macroeconomy. Coincidentally, the US exchange rate indicator also has the possibility of disobeying the normal distribution. The reason for this phenomenon is most likely that the unique international status of the US dollar has caused its exchange rate to deviate to a certain extent. Table 2 Descriptive statistics analysis of America s stock market and macroeconomic variables BP CPI PPI GYZJ INVEST M1 M2 EX CR I Average E Median Max Min Std value Deflection Kurtosis JB P-Value Sequence Stationary Test The reliability of VAR model estimation depends on the stability of the variable. To avoid pseudo-regression, the stability of the time series must be determined before establishing the model. The lag order is selected according to the SIC criterion, and the unit root test is performed on each variable by the ADF test method. The results show that SZZS, BP500, CPI, GYZJ, INVEST13, M1, M2, E, L and other variables are stable in the 1% confidence interval after the logarithmic first-order differential processing Granger Causality Test The Granger causality test is a method for judging the correlation between variables by examining whether there is a mutual causal relationship between variables. This article refers to the consumer price index (CPI), producer price index (PPI), industrial value added (GYZJ), first and third industry fixed asset investment (invest13), money supply (M1 and M2), total retail sales (CR), exchange rate (ER), interest rate (I) and stock market index (SZZS and BP500) carry out Granger causality test to determine whether there is a causal relationship between these variables. The Granger test found that the Shanghai Composite Index is the Granger reason of M1 and the reason of the weaker PPI Granger. The interest rate and the Shanghai Composite Index are Granger causality, and the industrial added value and the Shanghai Composite Index are weaker. While, the remaining macroeconomic variables and the Shanghai Composite Index have no obvious Granger causality. It can be concluded that the Shanghai Composite Index is greatly affected by monetary policy and inflation. This test verifies the previous point of view from the side. In the long run, China's stock market is strongly influenced by monetary policy, and the correlation with the macroeconomy is not very strong

6 In contrast, the United States, Granger test found: the S&P 500 index is CPI, PPI, asset investment, M2, Granger reason for total retail sales, and at the same time with industrial added value, M1, interest rates are Granger causality. Therefore, it can be concluded that in addition to the exchange rate, the S&P 500 index has certain links with all aspects of the US macro economy. This test verifies the correlation between the US stock market and the macroeconomy Johansen Cointegration Test The Johansen cointegration test can help determine whether there is a long-term stable equilibrium relationship between the interpreted variable and the explanatory variable. In this paper, two sets of data were used for Johansen cointegration test, which showed that within the 5% confidence interval. There is a long-term stable cointegration relationship between fixed assets investment (invest13) and money supply (M1) in the first and third industries, the Shanghai Stock Index (SZZS), the consumer price index (CPI), the producer price index (PPI), and the industrial value added (GYZJ) Building a VAR Model Before establishing a VAR model, we must first determine whether the VAR model is stable and test whether the VAR model has a unit root. At this time, all residuals are stationary sequences at 95% confidence level. As you can see the figure below, the VAR model is stable: Impulsive Response Analysis a) b) Graph 1: AR unit root test Based on the VAR model and the impulse response function, the dynamic impact path between the variables can be obtained. The impulsive response function is used to measure the effect of a standard deviation shock of a random disturbance term on the current and future values of endogenous variables. Investigating the impulsive response effect of China's stock market and macroeconomic variables. It could be concluded that the fluctuation of the Shanghai Stock Index has a very large impact on itself and is positive. CPI, M1, PPI rise, listed companies increase investment, and the rise of I will give the stock market directly declining effect. The development of China's industry, the increase in sales and retail sales, the rise of M2 and ER has a positive effect on the stock market, and the impact has basically disappeared in the later period. From the perspective of the impact of the Shanghai Composite Index on various macroeconomic impacts, the four indicators of inflation and monetary policy are positively affected by the positive impact of SZZS in this period, showing a complex number of peaks. After 7 th ending the rise in the stock market will help the exchange rate to appreciate, interest rates rising, and the economy will grow. Comparing the impulsive response effects of the US stock market and macroeconomic variables, which can be concluded that the fluctuation of the S&P 500 index has a very large and positive impact on itself. CPI, PPI rising, industrial growth, asset investment increasing, ER and interest rate increasing will led to a rise in the US stock market. An increase in M1 would have a negative impact on the stock market. From the perspective of BP's impact on various macroeconomy, the impulse response analysis is carried out. With the positive impact of BP in this period: inflation

7 factor CPI, the impulse response effect of PPI is inverted U-shaped, indicating that the stock market rise will lead to an increase in inflation rate. For the money supply, there is a downward trend, which the stock market's rising money supply declines. ER firstly fell sharply and then rebounded, and finally lost its influence in the ninth period. Interest rates showed an inverted U-shaped, interest rates fell first and then rise. The image formed a huge mountain, indicating that the stock market's rise will bring interest rates up. The impact 8 After the period, it basically disappeared. Industrial added value, asset investment and total retail sales showed an inverted U-shaped image, indicating that the US stock market rising will bring economic growth, and the impact will remain around 5-7 terms. In summary, there is a reasonable correlation between China's stock market and macroeconomy. Impulsive response analysis shows that there is a real correlation between the US stock market and most macroeconomic indicators Analysis of Variance Table 3 The variance decomposition of China s stock market and macroeconomic variables Period SZZS CPI PPI GYZJ INVEST M1 M2 CR ER I From the results of the analysis of variance, we can see that China's stock market is most affected by its own factors. In the first period, it reached a maximum of 94.8%, then gradually decreased, and stabilized at around 85.5% after the 10th period. The remaining macroeconomic variables have gradually increased the predictive effect on the stock index. Among them, the industrial added value contributed the most 2.4%, then the matching asset investment and total retail sales were 1.8% and 0.84% respectively. The exchange rate was the second highest, accounting for 2.33%, CPI was 1.1%, PPI was 0.9%, M1 and M2 totaled 4.45%, and the impact of the final interest rate only accounted for 0.64%. Table 4 The variance decomposition of America s stock market and macroeconomic variables Period BP CPI PPI GYZJ INVEST M1 M2 CR ER I

8 For the US stock market, it is also the most affected by its own factors. In the first period, it reached a maximum of 85.8%. Then gradually decreasing, and stabilized around 68% after the 10th period. The remaining macroeconomic variables have gradually increased the predictive effect on the stock index. Among them, the industrial added value contributed the most 12.9%, and the matching asset investment and total retail sales were 1.7% and 0.68%. The interest rate was the second highest, accounting for 8.76%. CPI was 1.67%, PPI was 1.26%, M1 and M2 totaled 1.85%, and the final exchange rate explained 3.16% of the stock market trend Empirical Results Taking a comprehensive look at the empirical analysis of the stock markets in China and the United States, this paper draws the following conclusions: (1) From the perspective of variance decomposition in China, the proportion of macroeconomic variables in various fields in China is similarly. Economic factors account for 5%, money supply accounts for 4%, inflation 2%, and exchange rate 2%. Accordingly, although China's stock market is still affected by monetary policy, the variables representing economic factors have generally surpassed monetary policy. This represents the maturity and development of China's stock market, trying to break the road of policy city and capital city. (2) Compared with the United States, China's stock market is more affected by monetary policy. Comparing with the 15% explanation of the US economic factor, it is clear that the proportion of 2% of the money supply is small. Which shows the close relationship between the US stock market and the macro economy. (3) Unlike China, the impact of the US stock market on inflation and the impact of money supply are opposite. This big probability comes from the international detachment of the US dollar. The rise in the United States has led to more international investors holding US dollars to invest in the US market, and a large number of dollars in circulation have been re-locked, thus curbing the money supply. (4) Unlike China, the US CPI and PPI have a positive impact on the stock market. The price index can indeed stimulate the economy and the market in the short term, but long-term inflation will inevitably lead to a slowdown and even a decline in economic growth. The United States takes advantage of the international dollar standard and passes the depreciation of the US dollar to pass the pressure of inflation. (5) An active monetary policy may not necessarily promote market enthusiasm and enable the stock market to develop healthily and steadily. From the M1 and M2 impulse response models of China and the United States, which can be seen that the negative effects of the release of currency on the stock market are more than positive. The possible reason is that the inflation expectations brought by the RRR cut will reduce the investors' future for the stock market. While the rising effect of hot money flowing into the stock market does not offset the effect of the decline

9 5 CONCLUSIONS AND RECOMMENDATIONS 5.1 Conclusion This paper compares the differences between the stock markets of China and the United States and draws the following conclusions: (1) The rise of CPI and PPI will affect the profit and loss of listed companies, thus restraining the stock price from rising. Due to the existence of international fluid capital, once China's exchange rate rises, which will have estimated funds to enter China's stock market, leading to the rise of the stock market, thus leading domestic inflation. However, the preference of the world for the US dollar and the quantitative easing policy of the US dollar have enabled countries to enjoy a lot of inflation for the United States while enjoying lowcost capital. The influx of foreign capital has caused the US stock market to rise, and the quantitatively loose US dollar has been able to support the stock price and wait for the economy to fully recover. (2) Before 2015, the positive correlation between China's stock market trend and macroeconomic trend was weak, and the stock market was still immature. Which was greatly affected by inflation and monetary policy. After 2015, the relationship between them has become closer. China's stock market has made great progress in scale and quality, and the A-share market has a positive correlation with China's macroeconomy. (3) There is difference between the United States and China's stock market in terms of perfection. The macroeconomic variables selected in this paper can only explain the 15% trend of China's stock market, but it can explain 32% of the US. Its maturity is still beyond ours. 5.2 Policy recommendations about the maturity of the stock market 1) Protecting the foreign exchange market, enhancing the currency impact China's currency does not have the natural advantage of the US dollar. Therefore, stabilizing investors' confidence in the RMB and enhancing the influence of the RMB on the international stage can protect China's domestic financial market and ensure the healthy and stable development of the stock market. 2) Establishing a security system, enriching the market system The policy choices in the bailout should be cautious, and at the same time, the anti-micro-duty should be prepared for the safety system to control the market. At the same time, in terms of quantity, China's stock market should maintain the speed of IPO issuance, closing to the standards of mature foreign markets in terms of market acceptance. In terms of quality, strictly limit the quality, both to consider the size of listed companies, but also to consider listed companies influence and innovation. 3) Strengthening the hedging mechanism, clarifying the delisting system Strengthening the hedging mechanism of China's stock market is a necessary condition for developing the size of China's stock market. Only a clear delisting system can improve the overall quality of listed companies in China for a long time. 4) Advocating rational investment ideas, cultivating qualified investors Affected by monetary policy, the speculative atmosphere made the function of stock market investment gradually faded by investors. In addition, the literacy of investors themselves needs to be strengthened to learn how to configure their assets. China should promote the concept of rational investment, strengthening the education and cultivation of investors, and enable both to grow together. REFERENCES [1] Marco Gallegati, Wavelet analysis of stock returns and aggregate economic activity[j]. Computational statistics &Data Analysis, 2008,52: [2] Atje, Raymond and boyan jovanovic. Stock Markets and Development[J]. European Economic Review,1993(37): [3] Chen Qi'an, Zhang Yuan, Liu Xing. Macroeconomic Environment, Government Regulation Policy and Stock Market Volatility: Empirical Evidence from China's Stock Market[J]. Economist, 2010(02):

10 [4] Zhang Baoyin, Wu Zhengbi. Research on the relationship between macroeconomics and stock market volatility [J]. Journal of Wuhan University of Technology, 2014, (12): [5] Li Yang. Analysis of the divergence between China's stock market and macroeconomics [J]. Southern Review, 2014, (4): Study on the Asymmetric Effect of China's Stock Market and Macroeconomic Correlation under Uncertain Policies [6] Li Xing. The impact of the deep development of China's stock market on economic growth [J]. Hunan Social Sciences, 2013 (127); [7] Xue Hualin. Comparative Analysis of the Correlation between China's Macroeconomics and Stock Markets [D]. Nanchang University, [8] Yang. Empirical study on the effectiveness of stock market and its relationship with the real economy [J]. Financial Theory and Practice, 2013 (183): AUTHORS Yuzhang Su is an undergraduate student, majoring in the international business and trade, in SHU-UTS SILC Business School at Shanghai University