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Analysis of the long-term relationship between macroeconomic variables and the Chinese stock market using heteroscedastic cointegration
Faculty of Business, Department of Finance, Auckland University of Technology, Auckland, New Zealand, and
Keshab M. Shrestha
Nanyang Business School, Nanyang Technological University, Singapore
Purpose – The purpose of this paper is to investigate the relationship between the Chinese stock market indices and a set of macro-economic variables, i.e. money supply, industrial production, inflation, exchange rate and interest rates. Design/methodology/approach – The aims of this paper are addressed using heteroscedastic cointegration analysis. Findings – Results show that the cointegrating relationship does exist between stock prices and the macro-economic variables in the highly speculative Chinese stock market. Detailed analysis shows stock market performance is positively related to that of macro-economy in the long term. Research limitations/implications – The results imply that in the long run, investors can benefit in terms of better returns and portfolio diversification as the Chinese economy is expected to continue to perform strongly. Originality/value – The main contributions of this paper are two-fold: first, this is the first paper to examine the long-term relationship between the stock market indices and macro-economic variables in China, one of largest economies in the world. Second, heteroscedastic cointegration analysis is used and hence this paper controls for time-varying volatility. Keywords Stock markets, China, Macro-economics, Statistical analysis Paper type Research paper
Managerial Finance Vol. 34 No. 11, 2008 pp. 744-755 # Emerald Group Publishing Limited 0307-4358 DOI 10.1108/03074350810900479
1. Introduction Numerous studies have analyzed how...