Exploring the association among performance of stock market and macroeconomic influences


Research Problem

The aim of the study is to association among performance of stock market and macroeconomic influences in Chinese market.

China is the second largest economy in the world and has experienced three decades of tremendous economic growth. The economic reforms have made china stock market as an effective source of information about corporate performance and investors perceived to have the same risk and share characteristic as developed markets (Firth, et al., 2014).

However, Rodrik (2015) analysed that the recent economic data and information (economic slowdown) about Chinese economy have resulted in significant rollercoaster trends in the stock market. Despite the fact, the government deployed a range of countermeasures such as interest rate drop, increased the money supply, and exchange rates control, the stock market has a continuous decreasing trend (He & Chen, 2016).


The four variables which this specifically intended to study include the interest rate, money supply, GDP (real economy) as well as exchange rate (Martinsen, et al., 2014).

Purpose of study

The Chinese economic structure and market mechanism is different when compare with industrialised and developed western economies. Moreover, there is less research which emphasis specifically in relation to Chinese stock market. (Liao, et al., 2015)

The objective of the study is to develop better understanding on the relationship of the stock market and macro-economic variables which both provide insight for the policy makers and investor. The dual effect of the macro-economic variables (Yao, et al., 2014) will be perceived by the policy makers in terms that how their actions could possibly affect the stock market as well as investor can judge how stock market would react for economic action of the government (Chen & Groenewold, 2015).

Structure of the Report

The outline of this study is first section enclosed research problem and purpose of research. The next section enclosed detailed literature review as well as theoretical framework and the third section discusses the research methodology suitable to conduct the research.

Literature Review

Stock market Performance

The stock market is a critical component of the free market economy and an important source of capital for the companies as well as investors have the opportunity to participate in the financial success and achievement of the corporation. The performance of the stock market is an indicator for the stock market and it gives signals to the investors about the future economic and corporate expectations (Beltratti, et al., 2013).

The changes in the stock market give a signal on the future state of the economy as a whole. The stock market is a critical aspect of the economy of the financial sphere and i.e. stock market performance is a prime indicator to understand and evaluate the health of the economy (Morrison, 2014).

Kaustia & Knüpfer (2015) elaborated that the stock market index gives highlight overall performance of the economy entirely and if the prices of the stock increasing it give positive sign about the economy and if the stock market is falling, then this reflect economy is struggling. The stock market index and movements are useful to elaborate trend and pattern of the economy. Then, the government takes measures which provide comfort to the investor, deliver positive information about the economic outlook as well as maintain the integrity of the stock market.

Shanghai Stock Exchange Composite Index [SHCOMP: IND]

Shanghai stock exchange composite index is a key stock exchange in the china which work on the weight capitalization index and track the A category as well as B category shares. The stock exchange started its operations in 1990 and carry out operations with based index of 100 (Bloomberg, 2015).

Relationship between stock market performance and macroeconomic variables

Empirical Literature

The impact of the macroeconomic variable on the performance of the stock in terms of stability has been studied through a number of theories. The first theory which examines the impact of macroeconomic variables and stock market performance was based on arbitrage pricing theory (APT) (Armstrong, et al., 2016).

According to Fama (1981), there is an inverse relationship between the stock performance and inflation as well as positive relationship between GDP and stock performance. The study of the Fama and Schwert (1978) examined the impact of the macroeconomic variables and its impact on the performance of the stock performance. The study concluded that there is a positive relationship between the stock performance and macroeconomic volatility (Fama, 2014; Alagidede & Panagiotidis, 2015).

Moreover, the study of the Chen et al (1987) used the arbitrage price theory (APT) to examine the connection between the performance of the stock market and a number of macroeconomic variables which are interest rate, supply of money, production and exchange rate. The result of the study showed that there is the positive and systematic relationship between the macroeconomic factor and performance of the market (Wilhelm, 2016).

The two significant studies Bulmash and Trivoli (1991) and Abdullah and Hayworth (1993) analysed and examined the impact and linkage of the macroeconomic factors and performance of the stock market. The studies show positive impact on the performance based on money supply, inflation, exchange rate and growth whereas it depicts negative impact based on inflation, trade deficit and interest rates. (Kuwornu, 2012; Ray & Sarkar, 2014)

The use of vector error correction model (VECM) by Maysami and Koh (2001) evaluated the macroeconomic factor and stock performance on the Singapore stock exchange which highlighted that interest rate, financial regulation and interest rates have the positive relationship with macroeconomic factors (Lin & Fu, 2015).

The recent study conducted by the Maghyereh (2000) viewed the linkage of the stock market performance and macroeconomic variables on the Jordan stock market using the co-integration analysis. The result of the study revealed that there is a positive relationship between the GDP, interest rate and exchange rate and performance of the stock market (Rajabi, et al., 2015).

Shanghai Stock Exchange and impact of Macroeconomic factors

The Shanghai Stock Exchange was established in 1990 but the market structure of the China had restricted the freedom because of control economy. However, recent market changes in effort to shift towards free market economy has opened up the stock exchange and it has gained significant important in the China economic system.

However, there is limited research has been conducted to examined the impact of the variables in the Chinese context. Therefore, this study is an attempt to develop knowledge and insight on the stock market performance and macroeconomic variables. The study will examine the relationship through examining the hypotheses (Beltratti, et al., 2014).

Theoretical framework

Relationship between interest rate and stock market performance

The interest rate affects the performance of the companies as well as economic system directly. A higher interest rate means borrowing become expense for the consumer which result in a decrease for a product which result in lower profitability and i.e. lower return for the investor. On the other hand, lower interest rate means consumer have low-cost borrowing which means increase revenues for the companies and better return for the investor.

Consequently, interest rate decision have a significant effect on the economic and consequently on the stock market. The impact of the increase and decrease interest rate is a critical factor in determining its impact on the performance of the Shanghai stock exchange (Baker, et al., 2015).

Relationship between money supply and stock market performance

The monetary policy has a significant effect on the economy because it has a direct effect on the market. The money supply either creates excessive liquidity in collaboration with increase price of the bond and lower level of interest rate. On the other hand, restrict liquidity policy reduce liquidity in the market which increase inflation and investor required a higher level of return as well as there is lower price of the stock (Morrison, 2015).

The restrictive monetary policy results in increased cost of capital for the companies. On the other hand, the effect of the money supply is linked with a nominal interest rate based on the lower level return which consequently increases the price of the stocks. Therefore, the impact and action of the government to manage the liquidity in the market have critical affect stock market performance. (Rajabi, et al., 2016)

Relationship between real GDP and stock market performance

Kuwornu (2015) discussed that the actual level of output in an economy is used as a proxy to determine the level of activity in an economy. The economic output increase during the expansion period signals an increase whereas economic output during the recession period is evident through decreasing output. During the time of economic growth, the demand for the product and service increase which increase profitability of the companies and therefore, investor expected better return which increase the prices of the shares (Armstrong, et al., 2016).

On the other hand, during the time of recession, the demand for the products and services decrease which affect the companies and consequently affect the performance of the stock index. The analysis and evaluation of the relationship between real economy and stock performance could not be emphasised less especially in the context emerging market such as china (Fama, 2014).

Relationship between Exchange rate and stock market performance

Basher et al (2015) explained that the impact of the exchange rate on the China because its export-led growth structure for the economy. The changes in the exchanges rate affect the competitiveness of the firms as well as exchange rate also affect the cash flow of the companies. Therefore, exchange rate affects the profitability and performance of the firm. The exchange rate system in china relative controlled by the government and the i.e. exchange rate is a prominent factor of the china economy.

Chen & Groenewold (2015) evaluated that the appreciation of the exchange rate means the goods of the firms become expensive abroad and less revenue which resultantly lower dividends for the investors. The studies have revealed that exchange rates have an inverse relationship with the performance of the stock market and thus, it prime indicator to study in China market context.


In this chapter, the research methodology used for this study is discussed. The success of the research depends upon the research design and this methodology includes the techniques used to gather, analyse and evaluate the data to gather result and validate conclusions. There is three of research which is explanatory, exploratory and descriptive. (Neelankavil, 2015)

Exploratory research is useful to analyse the situation and it is effective when there is no previous research exist. Explanatory research is useful to answer the how and why scenario based on developing the linking and evaluating existing data. At last, not least, descriptive research is useful to examine the information from range of scenarios and understand the characteristic of the variable. (Punch, 2013)

For this study, in order to explore the association between the performances of the stock market based on macroeconomic variables influence on Chinese market, exploratory research will be used. The purpose of the exploratory research is that it would to understand the situation and develop knowledge as there are fewer studies which examine the Chinese economy. (Babbie, 2015)

Inductive and deductive approaches

Denzin & Lincoln (2016) described that in to understand the relationship and impact of the variables, it is important to define whether inductive or deductive approach will be used.  The inductive approach is concerned with creation as well as development of the theory whereas deductive approach is associated with testing the theory.

In this study deductive approach will be used to examine the relationship between the macroeconomic variables and performance of the stock market. The deductive approach would allow answering the research question through analysing and evaluating the relationship and impact of the variables through testing the hypothesis. (Farquhar, 2012)

Qualitative vs. Quantitative study

Quantitative research is useful to measure the interaction between the variables through quantification of the data. It is effective to examine the outcome of the variables based on the quantification of the data and this approach allows that researcher can separate itself from the situation. Quantitative research allows exploring the problem in highly structured manner and data is analysed based on the statistical analysis. (Maxwell, 2012)

On the other hand, Wrenn, et al (2013) argued that qualitative research is useful to identify and evaluate the relationship between the variables in which researcher cannot separate itself from the situation and used non-quantifiable approach. The benefit offered by the qualitative research is that it allows to study the phenomena in short time and develop deeper insight. Qualitative approach is useful to explain the relationship between the variables in the social context using non-quantify data.

In this research, the economic data is presented and evaluated using the quantifiable data, i.e. quantitative approach will be used. The relationship of the variables of the variables will be explored through quantitative data and statistical analysis.

Data collection and analysis

Data collection is a most important phase of the research and it allows understanding the trends and patterns through drawing valid results from it. The reliable and valid data allows increase the value of the research as develop a better perspective on the problem. There are two types of data collection which are primary and secondary data. The primary is collected directly for the research whereas secondary data is already collected. (Brace, 2013)

The data analysis performed for such studies are usually based on the linear regression model, GARCH, vector error correction model (VECM) as well as cointegration analysis. (Lutkepohl, 2015; Pedregal & Young, 2002)

These techniques are briefly discussed below

Regression analysis

Regression is most widely and commonly used tool to conduct the econometric analysis. The regression analysis is useful to analyse the relationship between the variables and it is useful to explain the impact of the changes in variables on another. The regression analysis is represent through following equation

In the above equation, R represents the stock market performance and X1, X2 and so on represent the macroeconomic variables. In this study OLS (ordinary least square approach) will used to analyse and evaluate the variable relationship (Seber & Lee, 2015).

GARCH model

GARCH model is another important tool to examine and quantify variable relationship through performing the econometric analysis. There are number of studies which have performed the GARCH test to study the macroeconomic variable impact on the performance of the stock market. This model studies the variables through using the variances and normal regression sometime with mean formula (Hansen, et al., 2012).

Vector error correction model (VECM)

Seber & Lee (2015) explained that VECM is multivariate dynamic model which examine the relationship between the variables of the time series. This model takes account of the interaction between the variables and their dynamic properties to understand their relationship. The most commonly used technique to established the model and examine the variables under this approach is non-linear least square as well as two step least squares approach.

In this study, regression analysis will be used to examine the relationship between the stock market performances. The ordinal least regression model is relative useful to analyse and evaluate the relationship among the variables and how they are influence by the macroeconomic variables in the china market. The regression is useful to explain the fluctuation o the stock market because of the macroeconomic variables (Seber & Lee, 2016).

Data – time series and sources

There will number of the dataset will be required to conduct the analysis between the macroeconomic factors and expected observation as well as dataset will be ranged from 2005-2015. Some of the important sources of the data include the World Bank database, IMF database, National Bureau of Statistics of China, OECD and financial times.

The four specific variables which are selected to study which are interest rate, exchange rates, GDP data as well as monetary policy announcement will be collected and examined through multiple database and cross verified with number of studies relevant to each of the selected variables in order to determine its impact and relationship with the Shanghai Stock Exchange (Li, 2015).


The china economy has experienced growth as well as there have a number of reforms in the market to make the transition to free market economy. This has made the stock market a critical component of the china economy which provides the signal as well as provides information about the economy. The diverse and complex market structure, as well as recent dramatic fluctuations in the stock market, has increased the important to understand how the macroeconomic variables affect the stock market of china.

The range of measures such as exchange rate changes, interest rate, and supply of the money (buying bonds) as well as economic data from the Chinese government has failed to assure the investor which has resulted in significant decrease in the value of the stock market. There is a number of studied which has examined the stock market relationship with macroeconomic variables in developed markets context.

However, the significant importance of the Chinese stock through recent market evident has made is critical to Explore the association between the performances of the stock market based on macroeconomic variables influence on the Chinese market.

The objective of the study is to develop better understanding on the relationship of the stock market and macro-economic variables which both provide insight for the policy makers and investor.

Limitation of research

The limitation attached to this study is that it will examine the four macroeconomic variables only and their impact on the single stock exchange. The two factors which are size and size of the study which could make it impossible to examine a large number of variables.

Moreover, the research examines only the publication and quantitative data but it does not consider the important implication associated with trading practices which are human behaviour. Therefore, this study only examines the impact of the human behaviour and impact of the information which results in the irrational behaviour of the investors.

5.0 Time and Duration

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