Analysis of Economic Factors Affecting Stock Market

This dissertation concentrates on analysis of economic factors affecting Chinese stock market through examining relationship between stock market index and economic factors. Six economic variables are examined: industrial production, money supply 1, money supply 2, exchange rate, long-term government bond yield and real estate total value. Stock market comprises fixed interest stocks and equities shares. In this dissertation, stock market is restricted to equity market. The stock price in this dissertation refers to equity price. Shanghai Stock Exchange composite index, Shanghai Stock Exchange A share index and Shanghai Stock Exchange B share index are examined in this dissertation. The static model is chosen to build the time series regression model. Ordinary Least Square (OLS) estimator, skewness/kurtosis test, correlation matrix, VIF/Tolerance coefficient, Breusch-Pagan-Godfrey Test, White Test, Breusch-Godfrey (LM) method, Newey-West test and Dickey-Fuller GLS test are implemented to build reliable time series regression model. The coefficients, p-value and beta coefficients are used to make meaningful inference. Engle-Granger cointegration test is used to investigate whether there are long-term relationship between six economic variables and three kinds of stock market index in China. Cointegration test can reflect whether stock price can efficiently respond to information from these six economic variables. The empirical results from this dissertation tell investors pay attention to variation of exchange rate, growth rate of industrial production, growth rate of money supply 2 and real estate total value when they want to invest Chinese stock market. They also reflect that foreign investors and Chinese citizens who invest in the Chinese stock market have different response to the variation of economic variables