The Research On Correlation Between The Stock Market' And Bond Market's Returns In China

The stock market and bond market are two important components of security market in China. A portfolio mixed by stock and bond is very traditional and widely used. In order to achieve maximum returns with a minimum degree of risk, it is important to study the correlation between these two markets. Firstly, it is benefit for investors to make correct decision on investment. Secondly, it offers academic reference to policy-makers. Therefore, this research is significant both in theoretical and practical aspect.The purpose of the research is to explore whether the correlation exists between stock market'and bond market's return, what kind of correlation and which factors affect this correlation.This dissertation theoretically analyzed the mechanism of interaction between stock market and bond market, but also analyzed the impact of macroeconomic factors on the correlation, such as interest rate, inflation rate, money supply, fix asset invest, enterprise prosperity index, and etc. The empirical analysis consists of three areas. Firstly, test the correlation's existence between stock market'and bond market's return through establishing the VAR model. Meanwhile study on the impulse response function, variance decomposition and Granger causality. Secondly, describe and forecast the correlation between stock market'and bond market's return. Finally, investigate the short and long equilibrium correlation between the market return and macroeconomic variables. It also performs the factors analysis on the stock market and bond yields correlation coefficient.Empirical results show that the long-term equilibrium correlation between stock market'and bond market's return doesn't exist in the sample, whereas the result in the sub-sample period is the opposite. ARMA (1,2) model is the most effective to describe and predict the correlation. In the study of macroeconomic variables'impact, it is found that the cointegration does exist in the return of two markets'and macroeconomic variables, indicating that the long-term equilibrium relationship exists. By using vector error correction model to test the short-term correlation, five macroeconomic variables are all included in the equilibrium equation. Through multivariable linear regression model to study the macroeconomic and institutional factors'impact on correlation coefficient of stock market'and bond market'return, it is found that the seven variables, including interest rate, inflation rate, money supply, exchange rates, industrial added value, enterprise prosperity index and the stock market scale, except the institutional factor, are not significant.The empirical results of testing the existence of correlation and factor analysis are not consistent with the theoretical analysis. The reasons mainly rely on the isolation of two markets, unbalance of interaction and some institutional factors.Based on the theoretical and empirical analysis, some policy suggestions regarding to the future development of China's security market are raised at last.