THE RELATIONSHIP BETWEEN MACROECONOMIC VARIABLES AND THE CHINESE STOCK MARKET-AN APPLICATION OF VECTOR ERROR CORRECTION MODEL
Abstract: Using Johansen's vector error correction model, this paper investigates the long-term equilibrium between stock price and six selected macroeconomic variables in China. On testing different VECM models, we find that there is no long-term equilibrium between stock price and 6 macroeconomic variables, although there may exist long-term equilibrium among macroeconomic variables themselves. However, by applying impulse responses plots, we find that industrial production, exchange rate and interest rate do have effects on stock price that are consistent with economic hypotheses. This indicates that Chinese stock market does reflect economic situation to some extent, so it can be considered as an indicator of the real economy.
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