China Stock Returns And Macroeconomic Variables Volatility Empirical Analysis

The paper examines the extent to which the conditional volatility of stock market returns in Chinese stock markets is related to the conditional volatility of financial and business cycle variables. It employs monthly low-frequency datasets for China including the Composite Stock Index on the Shanghai Stock Exchange, the Component Stock Index on the Shenzhen Stock Exchange, value added of industry, the money supply, consumer price index, interest rates, exports and imports over the period from December 1990 to December 2002.The paper employs the same method that has been used by Schwert (1989) in the examination of the relationship between stock market volatility and macroeconomic volatility. Firstly, the paper uses the iterated weighted least squares to estimate the conditional volatilities of economic variables. And then it seasonally adjusts the conditional volatilities on the basis of Schwert (1989), because according to the analysis of the paper, the conditional volatility of each variable exhibits the cyclical seasonal movements and removing the cyclical seasonal movements will ensure the removal of the effects of nonessential factors on economic variables.Secondly, the paper tests the relation between the volatilities of the stock returns and macroeconomic cyclical variables by using Granger-causality test and the Hendry general-to-specific modelling strategy. We find that such factors we choose here as the volatilities of the value added of industry, the money supply, consumer price index, interest rates and exports, imports have influence on the volatility of the stock returns to some extent. At the same time, the volatility of the stock returns was found to be the determinants of the volatilities of consumer price index and exports. And the volatility of the Composite Stock Index on the Shanghai Stock Exchange affects the ones of the money supply and import more than the Component Stock Index on the Shenzhen Stock Exchange. However, no clearevidence is found that the volatility of the stock returns have the effect on the volatilities of the value added of industry.At last, we continue to analyze the influence which the macroeconomic growth rate has on the volatility of the stock returns. We make the macroeconomic growth rate as an exogenous variable to add to the above iterated weighted volatility model. From the above analysis, we can draw a conclusion that the volatility of the stock returns of Chinese stock markets will strengthen in economic expansion period and weaken in economic recession period.