Linkages between the Chinese stock market and the macroeconomic climate in the U.S. and EU

Sammanfattning: The purpose of this paper is to examine the relationship between investments in the Chinese stock market and shocks to the macroeconomic climate in the U.S. and in the EU. Four different indices are used in determining the investment response to shocks in the two different geographical regions of interest – The Shanghai Composite Index, CSI 300 Information Technology Index, CSI 300 Materials Index, and CSI 300 Industrials Index – with the first being a broader index and the three latter being a sector-specific index. Each index is investigated in relation to imports, central bank short-term interest rate, industrial production, and inflation, for both the U.S. and EU using a vector autoregressive (VAR) methods such as causality, variance decomposition, and impulse response functions. The results suggest that out of the four variables, import and inflation are the most significant variables in terms of their transmissive effects on the Chinese stock markets. The effect of the central bank rates and industrial production are significantly smaller and cannot be claimed to explain Chinese stock variations, at least in the context of this model and data set. This paper provides insights for investors looking to invest in the Chinese stock market and for policymakers operating within a Chinese context.