Comparative Study On Main International Stock Markets' Indices And GDP

Through Granger Causality Method, GARCH models, Cointegration analysis and Vector Error Correction Model (VECM), we research the relationship among USA GDP(Gross Domestic Product), UK GDP, Japan GDP and Hongkong GDP and the relationship among their Stock markets.This study intends to find the Cointegration relations among the international stock indices,GDP. We want to find out whether the four stock markets can be integrated and have the same long-term trend. We also want to find out whether USA GDP, UK GDP, Japan GDP and Hongkong GDP can make themselves a system and have a stable relationship in the long-term development. Then we set up ECM on the foregoing basis to study how Cointegration relation of stock markets affects every stock market's yield and how Cointegration relation of GDP affects every country or region's GDP growth, and to observe if the coefficient of Cointegration is significant. We comprehensively research the economic relationship among USA, UK, Japan and Hongkong from the point of view of GDP and stock market.With the exception of the first chapter, which is an introduction of this paper, the paper consists of four sections: theory basis and index choice, the model system and test method, the empirical study and results.1. theory basis and index choiceSecurities business is in close contact with macroeconomic. Especially, stock market is usually considered as the "weatherglass" of a country's economics and is acknowledged as one of beaconages of a country, and it is an important forecasting sign or symptom in macroeconomic analysis. Since GDP can reflect the exact scale,growth,structure and level of a country economy, most countries choose it to show the course of economic development and to compare with each other.We select four indices : USA DJIA, UK FTSE100, Japan NIKKEI225 and Hongkong HSI. The sample is daily index and quarterly index from 1991 to 2003. And we deal with the series by the algorithm of ln(x) and dln(x), then we have the natural logarithm series and difference of natural logarithm series(the stock index's yield series).From the point of view of international securities business, the stock market indices show the same movement trend more and more obviously. Because of the economic globalization, major stock markets in developed countries show evident characteristic of co-movement.We have already got the quarterly data of GDP from 1991 to 2003. There are two means for us to convert different GDP denoted in its own currency, exchange rate and PPP. We choose quarterly exchange rate to convert UK quarterly GDP, Japan quarterly GDP and Hongkong quarterly GDP to the uniformed measurement units of USD. As economic globalization goes, the relationships among countries are more and more close. By observing the quarterly and annual GDP growth, though there are some difference in the course of growth, but the characteristic of "simultaneity" does exist, which means that GDP rise or fall simultaneously.These characteristics and differences among stock markets and GDP are meaningful in the research of long-term Cointegration relation and possible different short-term adjustment.2. Introduction to the model system and test method This paper chiefly uses the Granger Causality Method, univariate GARCH(p,q) model, bivariate GARCH(1,1) model, Cointegration concept and Vector Error Correction Model (VECM).Granger Causality Method points out that if event Y is the cause of event X, then event Y can precede event X. The expression of "x Granger－caused y" doesn't means that y is the effect or result of x. Granger causality measures precedence and information content but does not by itself indicate causality in the more common use of the term.The class of GARCH models is suited to measure the volatility and correlation of financial time series. Especially, it can perfect measure the "fat tail,volatility cluster and long memory". The correlation that bivariate GARCH(1,1) model returns is the relationship of volatilities between two serie...