Original scientific paper
https://doi.org/10.1080/1331677X.2020.1716264
Dynamic relationship between the stock market and macroeconomy in China (1995–2018): new evidence from the continuous wavelet analysis
Rui Wang
Lianfa Li
Abstract
This article examines the relationship between the stock market
and three widely used macroeconomic variables, namely industrial
production growth, inflation, and long-term interest rate in
China. We use the continuous wavelet analysis to investigate
the correlations and lead–lag relationships between them in
the time–frequency domain by covering a period of 1995M01-
2018M04. Our findings show the positive relationship between
stock returns and industrial production growth and between
stock returns and inflation. Notably, we find that stock returns
and long-term interest rate are negatively correlated in short and
medium terms, while they are positively correlated in the long
term. The puzzling positive correlation between stock returns and
interest rate as well as the mixed lead–lag relationships suggest
that the Chinese stock market is quite undeveloped. There are
breakdowns of the link between the stock market and macroeconomy.
Neither the stock return can be used as a leading indicator
of the macroeconomy nor the real economy could predict
the booms or busts of the Chinese stock market.
Keywords
Stock market; macroeconomy; China; continuous wavelet analysis; time–frequency domain
Hrčak ID:
254402
URI
Publication date:
9.2.2021.
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