Matching Period Of Stock Market And Economic Growth: An Empirical Test

Stock market has always been regarded as the "barometer" and "thermometer" ofeconomic development. In its three hundred years’ development, stock market hasplayed a huge role in the development of the world economy and human history withits four main functions. The healthy development of stock market has become one ofthe most important factors of economic stability and development. The bettereconomic is developed, the healthier and more orderly the stock market is, and viceversa. In addition, the stock market’s reaction force to the economy is also veryobvious. For example, the Great Depression of1929-1933is conducted from theU.S. stock market to the real economy, and the global economic crisis in2008is alsostarted from the stock market. So far, the global economy is still not yet fully out ofthe shadow of the post-financial crisis era.Thus, we can summarize that there should be a strong interaction between tockmarket development and economic growth. Favorable growth will effectivelypromote the healthy and orderly development of the stock market and healthy stockmarket will play a larger role in promoting the economy.This paper has proposed the concept of matching period of stock marketdevelopment and economic growth. If we use the stock index gains rate and the GDPgrowth rate to represent the stock market and economic growth respectively, the stockprice index and the GDP growth rate are not matched in every single minute. In arelatively long period of time, they have a strong correlation. We call this periodmatching period of the stock market and economic growth. Based on this concept,once the matching period was measured, we can use it to explore the correlationbetween them.The main structure of the thesis is as followed: Chapter1introduces the research background and significance of this paper,described the main structure and content distribution as well as innovation anddeficiencies.Chapter2reviews the literature of the academic research on the relationshipbetween the stock market and economic growth. Backtracking through the literature,this paper found that scholars have long observed the linkage between the stockmarket and macroeconomic, and selected different periods, data and differentcountries, using a variety of econometric research methods, test the relationshipbetween the two, while the conclusions are quite different.Chapter3theoretically analyzes the transmission mechanism between the stockmarket and macroeconomic with Pagano AK model, the index system and the wealtheffect. In the foundation of the efficient market hypothesis, this paper put forward theconcept of effective stock market period and gives a detailed definition of matchingperiod.Chapter4introduces the time series of research methods used in this article,including time series analysis, time-domain analysis (VAR model, Granger causalitytest) and frequency domain analysis methods (spectral analysis and cross-spectralanalysis).Chapter5study the relationship of stock market development and economicgrowth and compute of the matching period using the quarterly GDP data of theUnited States and the S&P500Index and the Dow Jones Industrial Index during1953–2012.The results of time-domain analysis showed that there is a positive correlationbetween U.S. GDP and the S&P500index and the Dow Jones Industrial Averagewith a lag of one while there is a lag of three on the opposite.Frequency domain analysis indicates that U.S. GDP cycle is abo ut22quarters(5.5years), between the Kitchin cycle and Zhu Graham cycle. Compared with thefluctuations of the U.S. GDP, the Dow Jones index fluctuation cycle is shorter,fluctuations in frequency, with a strong time-varying characteristic. While Standard&Poor’s500Index reflects kind of stability.With the results of cross-spectral analysis, we can see that there is a maximum consistency of U.S. GDP and stock price index in a period of10quarters (2.5years).There is a matching period of10quarters between the U.S. stock market andeconomic growth. At the same time, in the matching period of10quarters, the stockprice index changes are leading about a quarter of the GDP changes.Chapter6is the revelation of the study and reference for China. The U.S. stockmarket has played a role of macro-economic "barometer‖and―thermometer‖, andmake due contribution to the development of the U.S. economy. These are related tomature regulatory systems, efficient allocation of resources and good qualityinvestors of the US. We propose the following suggestions: the government shouldsupport the development and prosperity of the stock market, cultivate the investor’sinvestment qualities and awareness. Also we should strengthen financial supervisionand increase the level of information disclosure to enhance the effectiveness ofChina’s stock market.